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Taxation One: Outline with Codals
Course Outline
Tax I
Based on Atty. Monteros outline, with integrated notes from Atty. Salvadors review class,
Reyes, some Mamalateo, and the various reviewers in school.
A. In General ..........................................................................................................1
B. General Principles...............................................................................................1
C. Income Tax on Individuals .................................................................................2
D. Definitions ........................................................................................................17
E. Income Tax Rates .............................................................................................18
F. Proprietary Educational Institutions and Hospitals ...........................................19
G. GOCCs ..............................................................................................................20
H. Passive Income ................................................................................................21
I. Minimum Corporate Income Tax (MCIT)............................................................23
J. Income Tax on Resident Foreign Corporations ..................................................24
K. Income Tax on Non-resident Foreign Corporations...........................................28
L. Improperly Accumulated Earnings Tax (IAET) ..................................................32
M. Tax-exempt Corporations .................................................................................34
N. Taxable Income................................................................................................38
P. Fringe Benefits Tax (FBT! Whut up!).................................................................47
Q. Deductions .......................................................................................................51
R. Capital Gains and Losses (Sale or Exchange of Property) .................................73
S. Determination of Gain or Loss from Sale or Transfer of Property ......................77
T. Situs of Taxation ...............................................................................................82
U. Accounting Periods and Methods ......................................................................87
V. Estates and Trusts ............................................................................................91
W. Returns and Payment of Taxes ........................................................................94
W. Withholding Tax ..............................................................................................99
A. In General
Taxable Income
The essential difference between capital and income is that capital is a fund; and
income is a flow. Capital is wealth, while income is the service of wealth.
Property is a tree, income is the fruit. Labor is a tree, income is the fruit. Capital is a
tree, income the fruit.
Income means profits or gains. (Madrigal v Rafferty)
Income may be defined as the amount of money coming to a person or corporation
within a specified time, whether as payment for services, interest or profit from
investment.
o A mere advance in the value of property of a person or a corporation in no
sense constitutes the income specified in the law. Such advance constitutes
and can be treated merely as an increase in capital. (Fisher v Trinidad)
Cash dividends is taxed as income because it has been realized/received, while stock
dividends is not taxed as income because it is merely inchoate as it is a mere
anticipation of income (it becomes income once you sell it).
o One is an actual receipt of profits; the other is a receipt of a representation of
the increased value of the assets of a corporation. (Fisher v Trinidad)
When dealing with money or property, the questions you should ask are:
o Is this capital or is this income?
o Has it been realized/received or is it merely inchoate?
B. General Principles
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Taxation One: Outline with Codals
SEC. 23. General Principles of Income Taxation in the Philippines. - Except when otherwise provided in this Code:
(A) A citizen of the Philippines residing therein is taxable on all income derived from sources within and without the
Philippines;
(B) A nonresident citizen is taxable only on income derived from sources within the Philippines;
(C) An individual citizen of the Philippines who is working and deriving income from abroad as an overseas contract
worker is taxable only on income derived from sources within the Philippines: Provided, That a seaman who is a
citizen of the Philippines and who receives compensation for services rendered abroad as a member of the
complement of a vessel engaged exclusively in international trade shall be treated as an overseas contract worker;
(D) An alien individual, whether a resident or not of the Philippines, is taxable only on income derived from sources
within the Philippines;
(E) A domestic corporation is taxable on all income derived from sources within and without the Philippines; and
(F) A foreign corporation, whether engaged or not in trade or business in the Philippines, is taxable only on income
derived from sources within the Philippines.
Who are taxable on income derived from all sources, whether within or outside the
Philippines? Taxed worldwide!
1. Resident citizens.
2. Domestic corporations.
The other kinds of taxpayers are subject to tax only on income derived from
Philippine sources.
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Non-resident citizens
Sec 22 (E). The term "nonresident citizen" means:
(1) A citizen of the Philippines who establishes to the satisfaction of the Commissioner the fact of his physical
presence abroad with a definite intention to reside therein.
(2) A citizen of the Philippines who leaves the Philippines during the taxable year to reside abroad, either as an
immigrant or for employment on a permanent basis.
(3) A citizen of the Philippines who works and derives income from abroad and whose employment thereat requires
him to be physically present abroad most of the time during the taxable year.
(4) A citizen who has been previously considered as nonresident citizen and who arrives in the Philippines at any
time during the taxable year to reside permanently in the Philippines shall likewise be treated as a nonresident
citizen for the taxable year in which he arrives in the Philippines with respect to his income derived from sources
abroad until the date of his arrival in the Philippines.
(5) The taxpayer shall submit proof to the Commissioner to show his intention of leaving the Philippines to reside
permanently abroad or to return to and reside in the Philippines as the case may be for purpose of this Section.
Meaning of non-resident citizen:
1. Citizen who establishes to the satisfaction of the Commissioner the fact of his
physical presence abroad with a definite intention to reside therein
2. Citizen who leaves the Philippines during the taxable year to reside abroad, either
as an immigrant or for employment on a permanent basis
3. Citizen who works and derives from abroad and whose employment thereat
requires him to be physically present abroad most of the time during the taxable
year
4. Citizen who has been previously considered as nonresident citizen and who
arrives in the Philippines at any time during the taxable year to reside
permanently in the Philippines shall likewise be treated as a nonresident citizen
for the taxable year in which he arrives in the Philippines with respect to his
income derived from sources abroad until the date of his arrival in the
Philippines.
Who are non-resident citizens? (RR 1-79)
1. Immigrant one who leaves the Philippines to reside abroad as an immigrant for
which a foreign visa has been secured
2. Permanent employee one who leaves the Philippines to reside abroad for
employment on a more or less permanent basis
3. Contract worker one who leaves the Philippines on account of a contract of
employment which is renewed from time to time under such circumstance as to
require him to be physically present abroad most of the time (not less than 183
days)
Non-resident citizens who are exempt from tax with respect to income derived from
sources outside the Philippines shall no longer be required to file information returns
from sources outside the Philippines beginning 2001. (RR 5-2001)
The phrase most of the time shall mean that the said citizen shall have stayed abroad
for at least 183 days in a taxable year.
The same exemption applies to an OCW but as such worker, the time spent abroad is
not material for tax exemption purposes all that is required is for the workers
employement contract to pass through and be registered with the POEA. (BIR Ruling
33-2000).
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o Determination is by his intention with regard to the length and nature of his stay.
(Sec 5, RR 2)
Loss of residence by alien
o An alien who has acquired residence in the Philippines retains his status until he
abandons the same and actually departs from the Philippines.
o A mere intention to change his residence does not change his status. An alien who
has acquired a residence is taxable as a resident for the remainder of his stay in the
Philippines. (Sec. 6, RR 2)
(HH) The term minimum wage earner shall refer to a worker in the private sector paid the statutory minimum
wage; or to an employee in the public sector with compensation income of not more than the statutory minimum
wage in the non-agricultural sector where he/she is assigned.
Dependent
Sec 35. (B) For purposes of this Subsection, a "dependent" means a legitimate, illegitimate or legally adopted child
chiefly dependent upon and living with the taxpayer if such dependent is not more than twenty-one (21) years of
age, unmarried and not gainfully employed or if such dependent, regardless of age, is incapable of self-support
because of mental or physical defect.
Dependent is a
o Legitimate, illegitimate or legally adopted child and living with the taxpayer
o Who must be:
Not more than 21,
Unmarried, and
Not gainfully employed, OR
Dependent, regardless of age, is incapable of self-support because of
mental or physical defect.
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Taxation One: Outline with Codals
(a) On the taxable income defined in Section 31 of this Code, other than income subject to tax under Subsections
(B), (C) and (D) of this Section, derived for each taxable year from all sources within and without the Philippines be
every individual citizen of the Philippines residing therein;
(b) On the taxable income defined in Section 31 of this Code, other than income subject to tax under Subsections
(B), (C) and (D) of this Section, derived for each taxable year from all sources within the Philippines by an
individual citizen of the Philippines who is residing outside of the Philippines including overseas contract workers
referred to in Subsection(C) of Section 23 hereof; and
(c) On the taxable income defined in Section 31 of this Code, other than income subject to tax under Subsections
(b), (C) and (D) of this Section, derived for each taxable year from all sources within the Philippines by an
individual alien who is a resident of the Philippines.
(2) Rates of Tax on Taxable Income of Individuals. - The tax shall be computed in accordance with and at the rates
established in the following schedule: (just see chart below, its the same thing)
For married individuals, the husband and wife, subject to the provision of Section 51 (D) hereof, shall compute
separately their individual income tax based on their respective total taxable income: Provided, that if any income
cannot be definitely attributed to or identified as income exclusively earned or realized by either of the spouses,
the same shall be divided equally between the spouses for the purpose of determining their respective taxable
income.
"Provided, That minimum wage earners as defined in Section 22 (HH) of this Code shall be exempt from the
payment of income tax on their taxable income: Provided, further, That the holiday pay, overtime pay, night shift
differential pay and hazard pay received by such minimum wage earners shall likewise be exempt from income tax.
Gross Income
Less: Deductions
Taxable Income
Tax Rate
Tax Due
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equally between them for the purpose of determining their respective taxable
income.
Minimum wage earners are exempt from the payment of income tax on their taxable
income. Holiday pay, overtime pay, night shift differential pay, and hazard pay received
by them are likewise exempt from income tax.
A non-resident alien individual engaged in trade or business in the Philippines is subject
to the income tax in the same manner as an individual citizen and a resident alien on
taxable income received from sources within the Philippines.
For non-resident aliens not so engaged, the tax is
o 25% of the entire or gross income received from sources within the Philippines
and
o 15% of the gross income received as compensation, salaries, and other
emoluments by reason of his employment by:
regional or area headquarters and regional operating headquarters of
multinational corporations;
offshore banking units established by a foreign corporation in the
Philippines; or
by foreign petroleum service contractor or subcontractors operating in the
Philippines. (Sec 25 (A-E))
Final income tax interests, royalties, awards, dividends, capital gains on sale of shares,
realty
Sec 24. (B) Rate of Tax on Certain Passive Income.
(1) Interests, Royalties, Prizes, and Other Winnings. - A final tax at the rate of twenty percent (20%) is hereby
imposed upon the amount of interest from any currency bank deposit and yield or any other monetary benefit from
deposit substitutes and from trust funds and similar arrangements; royalties, except on books, as well as other
literary works and musical compositions, which shall be imposed a final tax of ten percent (10%); prizes (except
prizes amounting to Ten thousand pesos (P10,000) or less which shall be subject to tax under Subsection (A) of
Section 24; and other winnings (except Philippine Charity Sweepstakes and Lotto winnings), derived from sources
within the Philippines: Provided, however, That interest income received by an individual taxpayer (except a
nonresident individual) from a depository bank under the expanded foreign currency deposit system shall be
subject to a final income tax at the rate of seven and one-half percent (7 1/2%) of such interest income: Provided,
further, That interest income from long-term deposit or investment in the form of savings, common or individual
trust funds, deposit substitutes, investment management accounts and other investments evidenced by certificates
in such form prescribed by the Bangko Sentral ng Pilipinas (BSP) shall be exempt from the tax imposed under this
Subsection: Provided, finally, That should the holder of the certificate pre-terminate the deposit or investment
before the fifth (5th) year, a final tax shall be imposed on the entire income and shall be deducted and withheld by
the depository bank from the proceeds of the long-term deposit or investment certificate based on the remaining
maturity thereof:
(2) Cash and/or Property Dividends - A final tax at the following rates shall be imposed upon the cash and/or
property dividends actually or constructively received by an individual from a domestic corporation or from a joint
stock company, insurance or mutual fund companies and regional operating headquarters of multinational
companies, or on the share of an individual in the distributable net income after tax of a partnership (except a
general professional partnership) of which he is a partner, or on the share of an individual in the net income after
tax of an association, a joint account, or a joint venture or consortium taxable as a corporation of which he is a
member or co-venturer:
Provided, however, That the tax on dividends shall apply only on income earned on or after January 1, 1998.
Income forming part of retained earnings as of December 31, 1997 shall not, even if declared or distributed on or
after January 1, 1998, be subject to this tax.
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Taxation One: Outline with Codals
(C) Capital Gains from Sale of Shares of Stock not Traded in the Stock Exchange. - The provisions of Section 39(B)
notwithstanding, a final tax at the rates prescribed below is hereby imposed upon the net capital gains realized
during the taxable year from the sale, barter, exchange or other disposition of shares of stock in a domestic
corporation, except shares sold, or disposed of through the stock exchange.
Not over P100,000........ 5%
On any amount in excess of P100,000 10%
Sec 22 (Y) The term "deposit substitutes" shall mean an alternative from of obtaining funds from the public (the
term 'public' means borrowing from twenty (20) or more individual or corporate lenders at any one time) other
than deposits, through the issuance, endorsement, or acceptance of debt instruments for the borrowers own
account, for the purpose of relending or purchasing of receivables and other obligations, or financing their own
needs or the needs of their agent or dealer. These instruments may include, but need not be limited to bankers'
acceptances, promissory notes, repurchase agreements, including reverse repurchase agreements entered into by
and between the Bangko Sentral ng Pilipinas (BSP) and any authorized agent bank, certificates of assignment or
participation and similar instruments with recourse: Provided, however, That debt instruments issued for interbank
call loans with maturity of not more than five (5) days to cover deficiency in reserves against deposit liabilities,
including those between or among banks and quasi-banks, shall not be considered as deposit substitute debt
instruments.
Tax Rate on Certain Passive Income on Citizens and Resident Final Tax
Aliens
1. Interest under the expanded foreign currency deposit system (see RR 7.5% (vs exempt
10-98 below) Nonresident citizens: exempt for nonresident
aliens engaged in
trade/biz)
2. Royalty from books, literary works, & musical compositions 10%
3. Royalty other than above 20%
4. Interest on any current bank deposit, yield or other monetary benefits 20%
from deposit substitute, trust fund & similar arrangement
5. Prize exceeding P10,000 20%
6. Other winnings, except Phil Charity Sweepstakes & Lotto 20%
7. Dividend from a domestic corp, or from a joint stock company,
insurance or mutual fund company, & regional operating headquarters of 10% (vs 20% for
multinational company or share in the distributive net income after tax o non-resident aliens
engaged in
a partnership (except a general professional partnership), joint stock or
trade/biz)
joint venture or consortium taxable as a corporation
But what about dividends from foreign corporations for citizens
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(not resident aliens)? Well, the income here enters into the
computation for Sec 24 (a) tax calendar. For resident aliens, they
are not taxed since its income derived from abroad.
8. Interest on long-term deposit or investment in banks (with maturity of exempt
5 years or more)
Prize the result of an effort (like a prize in a beauty contest)
Winning the result of a transaction where the outcome depends upon
chance (like betting)
Deposit substitute a means of borrowing money from the public (20 or
more individual or corporate lenders) other than by way of deposit with
banks through the issuance of debt instruments (like bankers
acceptances, promissory notes, repurchase agreements, certificates of
assignment or participation)
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If shares of stock are listed and traded through the local of 1% (or .005%) of the
stock exchange gross selling price or gross
value in money of the
shares of stock
If shares not traded through the local stock exchange
o Capital gains not over P100,000 5% of the net capital gains
o Capital gains in excess of P100,000 10% of the net capital gains
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(A) In General. - For purposes of determining the tax provided in Section 24 (A) of this Title, there shall be
allowed a basic personal exemption amounting to P50,000 for each individual taxpayer.
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In the case of married individuals where only one of the spouses is deriving gross income, only such spouse shall
be allowed the personal exemption.
(B) Additional Exemption for Dependents. - There shall be allowed an additional exemption of twenty five
thousand pesos (P25,000) for each dependent not exceeding four (4).
The additional exemption for dependent shall be claimed by only one of the spouses in the case of married
individuals.
In the case of legally separated spouses, additional exemptions may be claimed only by the spouse who
has custody of the child or children: Provided, That the total amount of additional exemptions that may be claimed
by both shall not exceed the maximum additional exemptions herein allowed.
For purposes of this Subsection, a "dependent" means a legitimate, illegitimate or legally adopted child
chiefly dependent upon and living with the taxpayer if such dependent is not more than twenty-one (21) years of
age, unmarried and not gainfully employed or if such dependent, regardless of age, is incapable of self-support
because of mental or physical defect. (Amended by RA 9504)
Change of status
Sec 35. (C) Change of Status. - If the taxpayer marries or should have additional dependent(s) as defined above
during the taxable year, the taxpayer may claim the corresponding additional exemption, as the case may be, in
full for such year.
If the taxpayer dies during the taxable year, his estate may still claim the personal and additional
exemptions for himself and his dependent(s) as if he died at the close of such year.
If the spouse or any of the dependents dies or if any of such dependents marries, becomes twenty-one
(21) years old or becomes gainfully employed during the taxable year, the taxpayer may still claim the same
exemptions as if the spouse or any of the dependents died, or as if such dependents married, became twenty-one
(21) years old or became gainfully employed at the close of such year.
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Personal Exemptions allowable to
nonresident alien individuals
If engaged in trade, business or in the exercise of Entitled to a personal exemption in the
a profession amount equal to the exemptions
allowed in the income tax law of his
country for Filipinos, but it shouldnt
exceed the amount fixed here for
exemptions
If not engaged in trade, business or in the exercise None, because Sec 25 (B) states that
of a profession he will be taxed upon his entire
income.
De Leon states that nonresident aliens are not entitled to additional exemptions for
dependents. (P. 135, Fundamentals of Taxation 2009)
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Example:
o Suppose a retailer of goods, an individual, whose accounting method is under the
accrual basis has a gross sales of P1m with a cost of sales amounting to P800k.
the computation of the OSD shall be determined as follows:
Gross Sales P1,000,000
Less: CoGS --------------
Basis of the OSD P1,000,000
x OSD Rate (max) .40
OSD Amount P400,000
If the taxpayer opts to use the OSD in lieu of the itemized deductions allowed
under Sec 34 of the Tax Code, his net taxable income shall be as follows:
Gross Sales P1,000,000
Less: CoGS ------------
Gross Sales/Gross InomeP1,000,000
Less: OSD (max) 400,000
Net Income P600,000
Exclusions and deductions (discussion from De Leons book, see also Sec 61-64 of RR 2)
Exclusions are incomes that are exempt from the tax. They are not to be included in the
tax return unless information regarding it is specifically called for.
o Examples:
Life insurance proceeds paid to beneficiaries upon the death of the
insured.
Value of the property acquired by inheritance or donation, because it is
subject to estate or donors tax.
Retirement benefits, pensions, etc, received by government officials and
employees from the GSIS and SSS in recognition of their services. So with
retirement benefits of private firms, under certain conditions.
Prizes and awards made primarily in recognition of religious, charitable,
scientific, educational, artistic, etc, competitions and tournaments.
Christmas bonus, 13th month pay, productivity incentives, and other
benefits received up to a max of P30,000.
Gains from the sale or retirement of bonds or other certificates of
indebtedness with a maturity of more than 5 years.
Deductions are items or amounts which the law allows to be deducted under certain
conditions from the gross income of a taxpayer in order to arrive at the taxable income.
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Both reduce actual gross income although exclusions are not included in the income tax
return.
Some general principals governing deductions include:
o The taxpayer seeking a deduction must point to some specific provision of the
statute authorizing the deduction; and
o He must be able to prove that he is entitled to the deduction authorized or
allowed.
They are allowed only where there is a clear provision in the statute for the
deduction claimed.
Taxable gross income is affected by exclusions because the latter are omitted from the
former and are not reported on the income tax return but is not affected by deductions
because they are subtracted after gross income is determined and are reported on the
return.
Kinds of deductions:
1. Deductions from compensation income.
2. Deductions from business/professional income.
3. Deductions from corporate income.
4. Special deductions
5. Deductions allowed by special laws.
(1) In General. - A nonresident alien individual engaged in trade or business in the Philippines shall be subject to
an income tax in the same manner as an individual citizen and a resident alien individual, on taxable income
received from all sources within the Philippines. A nonresident alien individual who shall come to the Philippines
and stay therein for an aggregate period of more than one hundred eighty (180) days during any calendar year
shall be deemed a 'nonresident alien doing business in the Philippines'. Section 22 (G) of this Code
notwithstanding.
(2) Cash and/or Property Dividends from a Domestic Corporation or Joint Stock Company, or Insurance or Mutual
Fund Company or Regional Operating Headquarters or Multinational Company, or Share in the Distributable Net
Income of a Partnership (Except a General Professional Partnership), Joint Account, Joint Venture Taxable as a
Corporation or Association., Interests, Royalties, Prizes, and Other Winnings. - Cash and/or property dividends
from a domestic corporation, or from a joint stock company, or from an insurance or mutual fund company or from
a regional operating headquarters of multinational company, or the share of a nonresident alien individual in the
distributable net income after tax of a partnership (except a general professional partnership) of which he is a
partner, or the share of a nonresident alien individual in the net income after tax of an association, a joint account,
or a joint venture taxable as a corporation of which he is a member or a co-venturer; interests; royalties (in any
form); and prizes (except prizes amounting to Ten thousand pesos (P10,000) or less which shall be subject to tax
under Subsection (B)(1) of Section 24) and other winnings (except Philippine Charity Sweepstakes and Lotto
winnings); shall be subject to an income tax of twenty percent (20%) on the total amount thereof: Provided,
however, that royalties on books as well as other literary works, and royalties on musical compositions shall be
subject to a final tax of ten percent (10%) on the total amount thereof: Provided, further, That cinematographic
films and similar works shall be subject to the tax provided under Section 28 of this Code: Provided, furthermore,
That interest income from long-term deposit or investment in the form of savings, common or individual trust
funds, deposit substitutes, investment management accounts and other investments evidenced by certificates in
such form prescribed by the Bangko Sentral ng Pilipinas (BSP) shall be exempt from the tax imposed under this
Subsection: Provided, finally, that should the holder of the certificate pre-terminate the deposit or investment
before the fifth (5th) year, a final tax shall be imposed on the entire income and shall be deducted and withheld by
the depository bank from the proceeds of the long-term deposit or investment certificate based on the remaining
maturity thereof:
Four (4) years to less than five (5) years - 5%;
Three (3) years to less than four (4) years - 12%; and
Less than three (3) years - 20%.
(3) Capital Gains. - Capital gains realized from sale, barter or exchange of shares of stock in domestic corporations
not traded through the local stock exchange, and real properties shall be subject to the tax prescribed under
Subsections (C) and (D) of Section 24.
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A nonresident alien engaged in trade or business in the Philippines is subject to the
same income tax rate as citizens and resident aliens, on taxable income received from
all sources within the Philippines.
A nonresident alien who stays in the Philippines for an aggregate period of more than
180 days shall be deemed as nonresident alien doing business in the Philippines.
Nonresident aliens not engaged in business are taxed 25% of their entire income within
the Philippines.
That means they have no deductions!
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Their capital gains are the same with nonresident aliens engaged in business (see table
above!)
Special aliens
Sec. 25 (C) Alien Individual Employed by Regional or Area Headquarters and Regional Operating
Headquarters of Multinational Companies. - There shall be levied, collected and paid for each taxable year
upon the gross income received by every alien individual employed by regional or area headquarters and regional
operating headquarters established in the Philippines by multinational companies as salaries, wages, annuities,
compensation, remuneration and other emoluments, such as honoraria and allowances, from such regional or area
headquarters and regional operating headquarters, a tax equal to fifteen percent (15%) of such gross income:
Provided, however, That the same tax treatment shall apply to Filipinos employed and occupying the same position
as those of aliens employed by these multinational companies. For purposes of this Chapter, the term
'multinational company' means a foreign firm or entity engaged in international trade with affiliates or subsidiaries
or branch offices in the Asia-Pacific Region and other foreign markets.
(D) Alien Individual Employed by Offshore Banking Units. - There shall be levied, collected and paid for each
taxable year upon the gross income received by every alien individual employed by offshore banking units
established in the Philippines as salaries, wages, annuities, compensation, remuneration and other emoluments,
such as honoraria and allowances, from such off-shore banking units, a tax equal to fifteen percent (15%) of such
gross income: Provided, however, That the same tax treatment shall apply to Filipinos employed and occupying the
same positions as those of aliens employed by these offshore banking units.
(E) Alien Individual Employed by Petroleum Service Contractor and Subcontractor. - An Alien individual who is a
permanent resident of a foreign country but who is employed and assigned in the Philippines by a foreign service
contractor or by a foreign service subcontractor engaged in petroleum operations in the Philippines shall be liable
to a tax of fifteen percent (15%) of the salaries, wages, annuities, compensation, remuneration and other
emoluments, such as honoraria and allowances, received from such contractor or subcontractor: Provided,
however, That the same tax treatment shall apply to a Filipino employed and occupying the same position as an
alien employed by petroleum service contractor and subcontractor.
Any income earned from all other sources within the Philippines by the alien employees referred to under
Subsections (C), (D) and (E) hereof shall be subject to the pertinent income tax, as the case may be, imposed
under this Code.
Special Aliens
1. Employed by regional or area headquarters & regional 15% on gross income
operating headquarters established in the Philippines by
multinational;
2. Employed by offshore banking units 15% on gross income
3. Permanent resident of a foreign country but who is employed 15%
and assigned in the Philippines by a foreign service contractor or
by a foreign service subcontractor engaged in petroleum
operations in the Philippines
Provided the same tax shall apply to Filipinos employed and occupying the same position
as these aliens.
These apply only to positions of a highly technical or highly managerial nature. (Atty.
Montero)
All income earned from all other sources within the Philippines by the special alien
employees shall be subject to the pertinent income tax imposed by the Code.
Tips on answering
Thought process in answering problems:
1. Is this income? If not, then its not really a income tax problem.
2. Whos the taxpayer? And whats the source? Refer to Sec 23!
3. Whats the specific rate? See sec 24-25!
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For example, what is the tax rate of on income derived from dividends from foreign
corporations for 1. Citizens 2. Resident aliens and 3. Nonresident aliens engaged in trade or
business?
1. Citizens
a. Yes, its income.
b. The source is outside the Philippines. Are they liable for sources from outside
the Philippines? Yes! Citizens are taxed worldwide!
c. Whats the specific tax rate? Hmm since its not in any of the charts, but
they still have to be taxed, then the income they derive from dividends from
foreign corporations will be considered in computing the tax rate based on the
tax calendar of Sec 24(a)
2. Resident aliens
a. Yes, its income.
b. The source is outside the Philippines. Are they liable for sources from outside
the Philippines? No! They arent taxed worldwide.
3. Nonresident aliens engaged in trade or business
a. Yes, my dear, its income.
b. The source is outside the Philippines. Are they liable for source from outside
the Philippines? No! They arent taxed worldwide either.
D. Definitions
Section 22, Tax Code
Definition of corporations
Sec 22 (B) The term "corporation" shall include partnerships, no matter how created or organized, joint-stock
companies, joint accounts (cuentas en participacion), association, or insurance companies, but does not include
general professional partnerships and a joint venture or consortium formed for the purpose of undertaking
construction projects or engaging in petroleum, coal, geothermal and other energy operations pursuant to an
operating consortium agreement under a service contract with the Government. "General professional
partnerships" are partnerships formed by persons for the sole purpose of exercising their common profession, no
part of the income of which is derived from engaging in any trade or business.
Corporations include:
o Partnerships, no matter how created or organized
o Joint-stock companies
o Joint accounts
o Associations
o Insurance companies
It does not include
o General professional partnerships;
o Joint venture or consortium formed for the purpose of undertaking construction
projects, or engaging in petroleum, coal, geothermal and other energy operations
pursuant to an operating or consortium agreement under a service contract with
the government. (The JV should NOT be incorporated.)
Remember your partnership lessons! (AFISCO and Pascual cases)
All co-owernships are not deemed unregistered partnerships.(Obillos v CIR)
The moment inheritance shares are used as part of the common assets to be used in
making profits, it is considered part of the taxable income of an unregistered
partnership. (Ona v CIR)
Requisites of a JV:
1. Contribution by each party
2. Profits are shared among the parties
3. There is joint right of mutual control over the subject matter
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4. There is a single business transaction rather than a general or continuous transaction
(BIR Ruling 317-92, in this case, the first agreement of the two parties to construct the
6750 Bldg was not taxable because they had not derived income/profits from it. the
construction of the building was mere return of the capital which they shelled out.
However, once the two corporations were placed under one sole management to operate
the business affairs of the two, the JV was taxable separate from the two corporations
comprising it. The distribution by the JV to the two constituent corporations was not
taxable because it was considered intra-corporate dividends.)
(A) In General. - Except as otherwise provided in this Code, an income tax of thirty-five percent (35%) is hereby
imposed upon the taxable income derived during each taxable year from all sources within and without the
Philippines by every corporation, as defined in Section 22(B) of this Code and taxable under this Title as a
corporation, organized in, or existing under the laws of the Philippines: Provided, That effective January 1, 2009,
the rate of income tax shall be thirty percent (30%).
In the case of corporations adopting the fiscal-year accounting period, the taxable income shall be computed
without regard to the specific date when specific sales, purchases and other transactions occur. Their income and
expenses for the fiscal year shall be deemed to have been earned and spent equally for each month of the period.
The corporate income tax rates shall be applied on the amount computed by multiplying the number of months
covered by the new rates within the fiscal year by the taxable income of the corporation for the period, divided by
twelve.
Provided, further, That the President, upon the recommendation of the Secretary of Finance, may effective January
1, 2000, allow corporations the option to be taxed at fifteen percent (15%) of gross income as defined herein, after
the following conditions have been satisfied:
(1) A tax effort ratio of twenty percent (20%) of Gross National Product (GNP);
(2) A ratio of forty percent (40%) of income tax collection to total tax revenues;
(3) A VAT tax effort of four percent (4%) of GNP; and
(4) A 0.9 percent (0.9%) ratio of the Consolidated Public Sector Financial Position (CPSFP) to GNP.
The option to be taxed based on gross income shall be available only to firms whose ratio of cost of sales
to gross sales or receipts from all sources does not exceed fifty-five percent (55%).
The election of the gross income tax option by the corporation shall be irrevocable for three (3)
consecutive taxable years during which the corporation is qualified under the scheme.
For purposes of this Section, the term 'gross income' derived from business shall be equivalent to gross
sales less sales returns, discounts and allowances and cost of goods sold. "Cost of goods sold" shall include all
business expenses directly incurred to produce the merchandise to bring them to their present location and use.
For a trading or merchandising concern, "cost of goods" sold shall include the invoice cost of the goods
sold, plus import duties, freight in transporting the goods to the place where the goods are actually sold, including
insurance while the goods are in transit.
For a manufacturing concern, "cost of goods manufactured and sold" shall include all costs of production
of finished goods, such as raw materials used, direct labor and manufacturing overhead, freight cost, insurance
premiums and other costs incurred to bring the raw materials to the factory or warehouse.
In the case of taxpayers engaged in the sale of service, 'gross income' means gross receipts less sales
returns, allowances and discounts.
Tax rate of Domestic Corporations 30% of taxable income from all sources within
and outside the Philippines, or
2% of gross income if MCIT applies, or
15% of gross income if the following conditions
are met:
1. tax effort ratio of 20% of GNP
2. ratio of 40% of income tax collection to
total tax revenues
3. VAT tax effort of 4% of GNP; and
4. .9% ratio of the Consolidated Public Sector
Financial Position (CPSFP) to GNP (this last
one has yet to be implemented)
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Option to be taxed based on gross income shall be available only to firms whose ratio of
cost of sales to gross sales or receipts from all sources does not exceed 55%
Election of the gross income tax option by the corporation shall be irrevocable for
3 consecutive taxable years
Domestic corporations are subject to any or some of the following:
Capital gains tax
Final tax on passive income
Normal tax
Minimum corporate income tax (MCIT)
Gross income tax (GIT)
Improperly accumulated earnings tax (IAET)
Gross Income Computation
Gross Sales
Less: Sales Returns
Discounts
Allowances
CoGS (all business expenses directly incurred to produce the merchandise and bring
them to their present location or use)
Total Gross Income
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prescribed in Subsection (A) hereof shall be imposed on the entire taxable income. For purposes of this Subsection,
the term 'unrelated trade, business or other activity' means any trade, business or other activity, the conduct of
which is not substantially related to the exercise or performance by such educational institution or hospital of its
primary purpose or function. A "Proprietary educational institution" is any private school maintained and
administered by private individuals or groups with an issued permit to operate from the Department of Education,
Culture and Sports (DECS), or the Commission on Higher Education (CHED), or the Technical Education and Skills
Development Authority (TESDA), as the case may be, in accordance with existing laws and regulations.
Proprietary educational institution is:
o Any private school maintained & administered by private individuals or groups
o With an issued permit to operate from the DECS or CHED or TESDA
Tax rate of proprietary educational10% on their taxable income (except for passive
institutions and hospitals income), or
30% on their entire taxable income if the gross
income from unrelated trade, business or other
activity exceeds 50% of the total gross income of
the institution
Unrelated trade, business or other activity means
o Any trade, business or other activity
o The conduct of which is not substantially related to the exercise or performance
by such its institution of its primary purpose or function.
For non-stock, non-profit educational institutions, all revenues use actually, directly and
exclusively for educational purposes are exempt.
o Their exemption refers only to revenues derived from assets used actually,
directly and exclusively for educational purposes.
o Income from cafeterias, canteens & bookstores are also exempt if they are
owned & operated by the educational institution and are located within the school
premises.
o However, they shall be subject to internal revenue taxes on income from trade,
business or other activity, the conduct of which is not related to the exercise or
performance by such educational institutions of their educational purposes or
functions, i. e. rental payment from their building/premises. (RR 76-2003)
For non-stock, non-profit corporations who are exempt, they are still liable for taxes on:
o Income derived from any of their real properties (rental payment form their
building premises)
o Any activity conducted from profit regardless of disposition thereof
o Interest income from any bank deposits or yield on deposit substitutes (final tax
of 20%)
o If its foreign currency deposit, final tax of 7.5% (Dep Order 149-95, 1995)
o They shall also be withholding agents for their employees compensation income
subject to withholding tax (RR 76-2003)
For private educational institutions, they are exempt from VAT, but they must be
accredited with either DECS or CHED.
o However, income derived from trade, business or other activity is still taxable.
o Their bank deposits and foreign currency deposits are exempt from withholding
taxes but they must show proof that such income is used to fund proposed
projects for their institutions improvement.
o They shall also be the withholding agents for their employees compensation
income subject to withholding tax.
G. GOCCs
Sec. 27 (C) Government-owned or Controlled-Corporations, Agencies or Instrumentalities. - The
provisions of existing special or general laws to the contrary notwithstanding, all corporations, agencies, or
instrumentalities owned or controlled by the Government, except the Government Service Insurance System
(GSIS), the Social Security System (SSS), the Philippine Health Insurance Corporation (PHIC), and the Philippine
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Charity Sweepstakes Office (PCSO), shall pay such rate of tax upon their taxable income as are imposed by this
Section upon corporations or associations engaged in s similar business, industry, or activity.
GOCCs are taxed on the same rate upon their taxable income upon corporations or
associations engaged in similar business, industry, or activity.
o Exempt GOCCs:
GSIS
SSS
PHIC
PCSO
As per RA 9337, PAGCOR was deleted from the list of exempt GOCCs.
H. Passive Income
Sec. 27 (D) Rates of Tax on Certain Passive Incomes. -
(1) Interest from Deposits and Yield or any other Monetary Benefit from Deposit Substitutes and from Trust Funds
and Similar Arrangements, and Royalties. - A final tax at the rate of twenty percent (20%) is hereby imposed upon
the amount of interest on currency bank deposit and yield or any other monetary benefit from deposit substitutes
and from trust funds and similar arrangements received by domestic corporations, and royalties, derived from
sources within the Philippines: Provided, however, That interest income derived by a domestic corporation from a
depository bank under the expanded foreign currency deposit system shall be subject to a final income tax at the
rate of seven and one-half percent (7 1/2%) of such interest income.
(2) Capital Gains from the Sale of Shares of Stock Not Traded in the Stock Exchange. - A final tax at the rates
prescribed below shall be imposed on net capital gains realized during the taxable year from the sale, exchange or
other disposition of shares of stock in a domestic corporation except shares sold or disposed of through the stock
exchange:
Not over P100,000..... 5%
Amount in excess of P100,000.. 10%
(3) Tax on Income Derived under the Expanded Foreign Currency Deposit System. - Income derived by a
depository bank under the expanded foreign currency deposit system from foreign currency transactions with
nonresidents, offshore banking units in the Philippines, local commercial banks including branches of foreign banks
that may be authorized by the Bangko Sentral ng Pilipinas (BSP) to transact business with foreign currency deposit
system shall be exempt from all taxes, except net income from such transactions as may be specified by the
Secretary of Finance, upon recommendation by the Monetary Board to be subject to the regular income tax
payable by banks: Provided, however, That interest income from foreign currency loans granted by such depository
banks under said expanded system to residents other than offshore banking units in the Philippines or other
depository banks under the expanded system shall be subject to a final tax at the rate of ten percent (10%).
Any income of nonresidents, whether individuals or corporations, from transactions with depository banks under
the expanded system shall be exempt from income tax
(4) Intercorporate Dividends. - Dividends received by a domestic corporation from another domestic corporation
shall not be subject to tax.
(5) Capital Gains Realized from the Sale, Exchange or Disposition of Lands and/or Buildings. - A final tax of six
percent (6%) is hereby imposed on the gain presumed to have been realized on the sale, exchange or disposition
of lands and/or buildings which are not actually used in the business of a corporation and are treated as capital
assets, based on the gross selling price of fair market value as determined in accordance with Section 6(E) of this
Code, whichever is higher, of such lands and/or buildings.
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Tax Rate on Capital Gains (same as individuals)
3. On sale of shares of stock of a domestic corporation NOT
listed and NOT traded thru a local stock exchange held as
a capital asset,
o Capital gains not over P100,000 5% of the net capital gains
o Capital gains in excess of P100,000 10% of the net capital gains
2. On sale of real property in the Philippines held as a capital
asset 6% of the gross selling
price, or the current market
value at the time of sale,
whichever is higher
Tax Rate of BANKS on Income Derived under the Expanded FCD Final Tax
System
1. Income derived by a depository BANK from foreign currency exempt
transactions with non-residents, OBUs, etc
2. Interest income from foreign currency loans granted by a bank to 10%
residents other than OBUs
Income of non-residents (individuals or corporations) from transactions with depository
bank under the expanded FCD system are exempt.
Sale of shares
Tax Rate on Income from Sale, Barter, Exchange or
other Disposition of Shares of Stock (RR 6-2008)
If shares of stock are listed and traded through the local of 1% (or .005%) of the
stock exchange gross selling price or gross
value in money of the
shares of stock
If shares not traded through the local stock exchange
o Capital gains not over P100,000 5% of the net capital gains
o Capital gains in excess of P100,000 10% of the net capital gains
FCDU
Income of non-residents (individuals or corporations) from transactions with depository
bank under the expanded FCD system are exempt.
Intercorporate dividends
Dividends received by a domestic corporation from another domestic corporation shall
not be subject to tax.
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o Why? Law assumes that the dividends received will be injected to the capital,
which will eventually be taxed when the corporation gets income from the use of
the capital.
Sale of realty
Final Tax Rate on Sales, Exchanges, or Transfers or Real
Properties Classified as Capital Assets (RR 8-98)
Sale of real property in the Philippines 6% of the gross selling
price, or the current
market value at the time
of sale, whichever is
higher
If sale was made to the government or to GOCCs Either 6% of the gross
selling price/current
market value or under
the normal income tax
rate, taxpayers option
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and cost of goods sold. "Cost of goods sold' shall include all business expenses directly incurred to produce the
merchandise to bring them to their present location and use.
For a trading or merchandising concern, "cost of goods sold' shall include the invoice cost of the goods sold, plus
import duties, freight in transporting the goods to the place where the goods are actually sold including insurance
while the goods are in transit.
For a manufacturing concern, cost of "goods manufactured and sold" shall include all costs of production of finished
goods, such as raw materials used, direct labor and manufacturing overhead, freight cost, insurance premiums and
other costs incurred to bring the raw materials to the factory or warehouse.
In the case of taxpayers engaged in the sale of service, 'gross income' means gross receipts less sales returns,
allowances, discounts and cost of services. "Cost of services" shall mean all direct costs and expenses necessarily
incurred to provide the services required by the customers and clients including (A) salaries and employee benefits
of personnel, consultants and specialists directly rendering the service and (B) cost of facilities directly utilized in
providing the service such as depreciation or rental of equipment used and cost of supplies: Provided, however,
That in the case of banks, "cost of services" shall include interest expense.
Example
Year 4 Year 5 Year 6 Year 7
MCIT 200 400 100 100
Normal 100 200 300 200
(1) In General. - Except as otherwise provided in this Code, a corporation organized, authorized, or existing under
the laws of any foreign country, engaged in trade or business within the Philippines, shall be subject to an income
tax equivalent to thirty-five percent (35%) of the taxable income derived in the preceding taxable year from all
sources within the Philippines: Provided, That effective January 1, 1998, the rate of income tax shall be thirty-four
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percent (34%); effective January 1, 1999, the rate shall be thirty-three percent (33%), and effective January 1,
2000 and thereafter, the rate shall be thirty-two percent (32%).
In the case of corporations adopting the fiscal-year accounting period, the taxable income shall be computed
without regard to the specific date when sales, purchases and other transactions occur. Their income and expenses
for the fiscal year shall be deemed to have been earned and spent equally for each month of the period.
The reduced corporate income tax rates shall be applied on the amount computed by multiplying the number of
months covered by the new rates within the fiscal year by the taxable income of the corporation for the period,
divided by twelve.
Provided, however, That a resident foreign corporation shall be granted the option to be taxed at fifteen percent
(15%) on gross income under the same conditions, as provided in Section 27 (A).
(2) Minimum Corporate Income Tax on Resident Foreign Corporations. - A minimum corporate income tax of two
percent (2%) of gross income, as prescribed under Section 27 (E) of this Code, shall be imposed, under the same
conditions, on a resident foreign corporation taxable under paragraph (1) of this Subsection.
Tax rate of Foreign Resident 30% of taxable income from all sources within the
Corporations Philippines, or
2% of gross income if MCIT applies, or
15% of gross income (again, the GIT has yet to
be implemented)
International Carrier
Sec 28 (A)
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(3) International Carrier. - An international carrier doing business in the Philippines shall pay a tax of two and one-
half percent (2 1/2%) on its "Gross Philippine Billings" as defined hereunder:
(a) International Air Carrier. - "Gross Philippine Billings" refers to the amount of gross revenue derived from
carriage of persons, excess baggage, cargo and mail originating from the Philippines in a continuous and
uninterrupted flight, irrespective of the place of sale or issue and the place of payment of the ticket or passage
document: Provided, That tickets revalidated, exchanged and/or indorsed to another international airline form part
of the Gross Philippine Billings if the passenger boards a plane in a port or point in the Philippines: Provided,
further, That for a flight which originates from the Philippines, but transshipment of passenger takes place at any
port outside the Philippines on another airline, only the aliquot portion of the cost of the ticket corresponding to the
leg flown from the Philippines to the point of transshipment shall form part of Gross Philippine Billings.
(b) International Shipping. - "Gross Philippine Billings" means gross revenue whether for passenger, cargo or mail
originating from the Philippines up to final destination, regardless of the place of sale or payments of the passage
or freight documents.
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Tax rate of offshore banking units authorized by the BSP (including any interest income
foreign currency loans granted to residents) is 10% final tax.
Income of nonresidents from transactions with OBUs shall be exempt from income tax.
An offshore banking unit is a branch of a foreign bank whish is authorized by the BSP to
transact offshore banking business in the Philippines.
A foreign currency deposit unit is a department of a local bank or an inexisting local
branch of a foreign bank which is authorized by the BSP to operated under the expanded
foreign currency deposit system.
Gross onshore income covers all income arising from transactions allowed by the BSP
conducted by and between an offshore bank with another offshore bank or with an FCDU
or with a non-resident. (RR 10-76)
The following are included in computing the gross onshore income of OBUs and FCDUs?
o Gross interest income arising from foreign currency loans and advances and
investments with residents
o Fees, commissions and other charges which are integral parts of the income from
foreign currency loan transactions are EXEMPT. They are not to be included in
computing the final tax. (RR 14-77)
o
Tax Rate on Interest Income from Foreign Currency Deposit (RR
10-98)
1. Interest income actually received by a resident citizen or resident alien 7.5% final
from FCD withholding tax
2. If it was deposited by an OCW or seaman or nonresident citizen Exempt
3. If it was in a bank account in the joint names of an OCW and his 50% exempt/
spouse (who is a resident) 50% final
withholding tax
of 7.5%
4. Interest income actually received by a domestic corporation or 7.5% final
resident foreign corporation from FCD withholding tax
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Interests
Dividends
Rents
Royalties
Payment for technical services
Salaries and wage premiums
Annuities, emoluments, or other fixed or determinable casual gains
Profits, income & capital gains
Except if the above are connected with the conduct of its business in the
Philippines.
Passive income is not included in computing for the BPRT. It is subject to a final tax.
(Compania General de Tabacos v CIR)
o Except when it arises from business activity in which the corporation is engaged
or connected with the conduct of its business in the Philippines.
Dividends from a local corporation to a non-resident foreign corporation is not subject to
BPT but to final withholding tax. (Marubeni v CIR, 1990)
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premiums (except reinsurance premiums), annuities, emoluments or other fixed or determinable annual, periodic
or casual gains, profits and income, and capital gains, except capital gains subject to tax under subparagraph 5(c)
Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%)
Non-resident foreign corporations are subject to 30% income tax on the gross income
derived during each taxable year from all sources within the Philippines only
o Special corporations (seen below) are subject to a different tax rate
When the foreign corporation transacts business in the Philippines independently of its
branch in the country, the principal agent relationship is set aside. The transaction
becomes that of the foreign corporation, not of the branch, hence, the corporation is
considered a foreign non-resident corporation for that isolated and independent
transaction. (Marubeni v CIR)
A casual activity in the Philippines by a foreign corporation does not amount to engaging
in trade or business in the Philippines for income tax purposes. In order that a foreign
corporation may be considered engaged in trade or business, its business transactions
must be continuous. (NV Reederij v CIR)
SPECIAL CORPORATIONS
Tax Rate Tax Base
Non-resident owner of lessor of 4.5% Gross rentals, lease and
vessel charter fees from the Phil
Non-resident cinematographic film 25% Gross income from the Phil
owner, lessor, or distributor
Non-resident lessor of aircraft, 7.5% Gross rentals, charges and
machinery and other equipment other fees from Phil sources
Proprietary educational institution 10% Taxable income from all
and non-profit hospital sources
Resident international carrier 2.5% Gross Philippine billings
Regional operating headquarters of 10% Philippine Taxable income
multinational corporation
Theres no MCIT for special corporations
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Not over P100,000............5% On any amount in excess of P100,000 10%
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CIR v Wander Philippines had the same facts as CIR v P&GPMC. But in Wander, the
country at issue was Switzerland and it did not even impose any income tax on the
dividends received by Swiss corporations from foreign corporations.
o THE SC said that the condition of taxes deemed paid was already complied
with since no income tax was imposed on the dividends in the first place.
In both cases, the taxpayers were entitled to a refund.
1
Article 23 of the RP-US tax treaty and Article 23 of the RP-China tax treaty, though differently worded, plainly
reveal a similarity in the provisions on relief from or avoidance of double taxation to their respective residents.
Thus, the tax on royalty payments to residents of US and China are paid under similar circumstances, i.e., the
amount of royalty income tax paid or accrued to the Philippines under the respective tax treaties is available as tax
credit against the income tax payable in their respective countries. US residents may, therefore, invoke the
preferential tax rate of 10% on royalties, accruing beginning January 1, 2002, arising in the Philippines "from the
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(D) Improperly Accumulated Taxable Income. - For purposes of this Section, the term 'improperly accumulated
taxable income' means taxable income' adjusted by:
(1) Income exempt from tax;
(2) Income excluded from gross income;
(3) Income subject to final tax; and
(4) The amount of net operating loss carry-over deducted;
And reduced by the sum of:
(1) Dividends actually or constructively paid; and
(2) Income tax paid for the taxable year.
Provided, however, That for corporations using the calendar year basis, the accumulated earnings under tax shall
not apply on improperly accumulated income as of December 31, 1997. In the case of corporations adopting the
fiscal year accounting period, the improperly accumulated income not subject to this tax, shall be reckoned, as of
the end of the month comprising the twelve (12)-month period of fiscal year 1997-1998.
(E) Reasonable Needs of the Business. - For purposes of this Section, the term 'reasonable needs of the business'
includes the reasonably anticipated needs of the business.
use of, or the right to use, any patent, trademark, design or model, plan, secret formula or process, . . ., or for
information concerning industrial, commercial or scientific experience" under the RP-China tax treaty, pursuant to
the "most-favored-nation" clause of the RP-US tax treaty.
It bears stressing, however, that there are two important requirements that should be complied with before the
10% rate of withholding tax on royalties remitted to a resident of US and China may be availed of, to wit:
1. It is necessary that there be an agreement or a contract whereby the royalties paid to the US must originate
from the use of, or the right to use any patent, trade mark, design or model, plan, secret formula or process, or
from the use, or the right to use, industrial, commercial or scientific experience; and
2. For as long as the contract or agreement is subject to approval under Philippine law, the same must be duly
approved by the Philippine competent authorities.
All internal revenue officers, employees and others concerned are enjoined to give this Circular the widest publicity
possible.
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How do you determine if a corporation is a closely-held one? Look at
stock-ownership!
If stock not owned by individuals, it will be considered to be owned
proportionately by its shareholders.
If its a family & partnership ownership, an individual shall be
considered to own the stock for his family members or partners.
If theres an option to acquire stocks, it shall be considered as
being owned by the person with the option. (BIR Ruling 25-02)
Who are not covered?
1. Publicly-held corporations
2. Banks and other financial institutions
3. Insurance companies
4. Taxable partnerships
5. General professional partnerships
6. Non-taxable joint ventures
7. Enterprises registered with PEZA or with the BCDA or with other special economic
zones (the last four are based on RR 2-01)
Whats prima facie evidence of IAE?
o The fact that any corporation is a mere holding company or investment company
o The fact that the earnings or profits of a corporation are permitted to accumulate
beyond the reasonable needs of the business
o Investment of substantial earnings in unrelated business or in stock or securities
of an unrelated business
o Investment in bonds and other long term securities
o Accumulation of earnings in excess of 100% of paid up capital (the last three are
based on RR 2-01)
How do you compute for the improperly accumulated taxable income?
Taxable Income,
INCREASED BY:
Income exempt from tax
Income excluded from gross income
Income subject to final tax
The amount of net operating loss carry over (NOLCO)
DEDUCTED BY:
Dividends actually or constructively paid
Income tax paid for the taxable year
Amount reserved for reasonable needs of the business
emanating from the covered years taxable income (from
Reyes, p. 71)
EQUALS:
Improperly accumulated taxable income
X 10% (IAET)
What you have to pay
Reasonable needs means the immediate needs of the business. If the corporation can
not prove this, then it is not an immediate need. In order to determine whether profits
are accumulated for the reasonable needs of the business as to avoid the surtax upon
shareholders, the controlling intention of the taxpayer is that which is manifested at the
time of accumulation, not subsequently declared intentions which are merely the product
of afterthought. (Manila Wine Merchants v CIR)
o This is the immediacy test in RR 2-01.
Reasonable needs means the immediate needs of the business including
reasonably anticipated needs. The burden of proof is with the corporation.
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The touchstone of liability is the purpose behind the accumulation of the income and not
the consequences of the accumulation. So, if the failure to pay dividends were for the
purpose of using the undistributed earnings and profits for the reasonable needs of the
business, that purpose would not fall within the interdiction of the statute. (CIR v
Tuason)
The tax on improper accumulation of surplus is essentially a penalty tax designed to
compel corporations to distribute earnings so that the said earnings by shareholders,
could, in turn, be taxed. When corporations do not declare dividends, income taxes are
not paid on the undeclared dividends received by the shareholders. (Cyanamid v CTA)
What are considered reasonable?
a. Allowance for the increase of accumulated earnings up to 100% of the paid-up
capital
b. Earnings reserved for building, plant, or equipment acquisitions as approved by
the Board of Directors (expansion, improvement, and repairs)
c. Earnings reserved for compliance with any loan or obligation established under a
legitimate business agreement (debt retirement)
d. In case of subsidiaries of foreign corporations in the Philippines, all undistributed
earnings intended or reserved for investments in the Philippines
e. Earnings required by law to be retained (RR 2-01)
f. Anticipated losses or reverses in business (Reyes, p. 70)
M. Tax-exempt Corporations
SEC. 30. Exemptions from Tax on Corporations. - The following organizations shall not be taxed under this Title in
respect to income received by them as such:
(A) Labor, agricultural or horticultural organization not organized principally for profit;
(B) Mutual savings bank not having a capital stock represented by shares, and cooperative bank without capital
stock organized and operated for mutual purposes and without profit;
(C) A beneficiary society, order or association, operating fort he exclusive benefit of the members such as a
fraternal organization operating under the lodge system, or mutual aid association or a nonstock corporation
organized by employees providing for the payment of life, sickness, accident, or other benefits exclusively to the
members of such society, order, or association, or nonstock corporation or their dependents;
(D) Cemetery company owned and operated exclusively for the benefit of its members;
(E) Nonstock corporation or association organized and operated exclusively for religious, charitable, scientific,
athletic, or cultural purposes, or for the rehabilitation of veterans, no part of its net income or asset shall belong to
or inures to the benefit of any member, organizer, officer or any specific person;
(F) Business league chamber of commerce, or board of trade, not organized for profit and no part of the net
income of which inures to the benefit of any private stock-holder, or individual;
(G) Civic league or organization not organized for profit but operated exclusively for the promotion of social
welfare;
(H) A nonstock and nonprofit educational institution;
(I) Government educational institution;
(J) Farmers' or other mutual typhoon or fire insurance company, mutual ditch or irrigation company, mutual or
cooperative telephone company, or like organization of a purely local character, the income of which consists solely
of assessments, dues, and fees collected from members for the sole purpose of meeting its expenses; and
(K) Farmers', fruit growers', or like association organized and operated as a sales agent for the purpose of
marketing the products of its members and turning back to them the proceeds of sales, less the necessary selling
expenses on the basis of the quantity of produce finished by them;
Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind and character of the
foregoing organizations from any of their properties, real or personal, or from any of their activities conducted for
profit regardless of the disposition made of such income, shall be subject to tax imposed under this Code.
The following organizations are tax-exempt, providing they are not organized for profit:
1. Labor, agricultural and horticultural organizations
2. Mutual savings bank without capital stock represented by shares & cooperative
banks without capital stock
3. A beneficiary society, order or association operating for the exclusive benefit of the
members (like a frat operating under the lodge system, a mutual aid association, a
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non-stock corporation organized by employees providing for the payment of life,
sickness, or other benefits exclusive to its members)
4. Cemetery company owned & operated exclusively for the benefit of its members
5. Non-stock corporations or associations organized and operated exclusively for
religious, charitable, scientific, athletic or cultural purposes or for the rehab of
veterans, no part of its net income or asset shall belong to or inures to the benefit of
any member or specific person
6. Business league chamber of commerce or board of trade, no part of its income inures
to any individual
7. Civic league or organization operated exclusively for the promotion of social welfare
8. A non-stock and non-profit educational institution
9. Government educational institution
10. Farmers or other mutual typhoon or fire insurance company, mutual ditch or
irrigation company, mutual or cooperative telephone company, or like organizations
or a purely local character, the income of which consists solely of dues, assessments
& fees collected from members for the sole purpose of meeting its expenses
11. Farmers, fruit growers or like associations organized and operated as sales agent
for the purpose of marketing the products of its members & turning back to them the
proceeds less expenses
They are not subject to income tax on income received by them from undertakings
which are essential to or necessarily connected with the purposes for which they were
organized and operated.
o But they are subject to income tax on income of whatever kind and character
from any of their properties (real or personal), or from any of their activities
(unrelated) conducted for profit, regardless of the disposition made of such
income.
Some stuff from the Omnibus Investment Code of 1987 (Art 39, EO 226 - Incentives
to Registered Enterprises under the Investment Priorities Plan) these are
activity-driven incentives:
o Income Tax Holiday
For pioneer firms 6 years from commercial operation
For non-pioneer firms 4 years from commercial operation
For newly registered firms fully exempt from income taxes
Extension of tax exemption for more than 1 year:
If the project meets the prescribed ratio of capital equipment to
number of works set by the Board
If the utilization of indigenous raw materials are at rates set by the
Board
If the net foreign exchange savings or earnings amount to at least
$5m annually during the first 3 years of operation
o But no registered firm may avail of this incentive for a
period exceeding 8 years
Exemption for registered expanding firms:
For a period of 3 years form commercial operation, registered
expanding firms are entitled to tax-exemption proportionate to
their expansion, but if it availed of this incentive during this period,
it is NOT entitled to additional deduction for incremental labor
expense
This incentive cannot be extended beyond 3 years
o Additional deduction for labor expense
For the first 5 years from registration, a registered enterprise is allowed
an additional deduction of 50% of the wages corresponding to the
increment in the number of DIRECT labor for skilled and unskilled labors if
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the project meets the prescribed ratio of capital equipment to number of
workers set by the Board
This exemption shall be doubled if the activity is located in less
developed areas
o Tax & Duty exemption on imported capital equipment
Within 5 years from the effectivity of this code (until 1992), importations
of machinery and equipment and spare parts of registered enterprises
shall be 100% exempt of customs duties and revenue tax, but the
importation must comply with the following conditions:
They are not manufactured domestically in sufficient quantity of
comparable quality and at reasonable prices
They are reasonably needed and will be used exclusively by the
registered enterprise in the manufacture of its products
The approval of the Board was obtained for such importation
o Tax credit for domestic capital equipment
A tax credit of 100% of the value of the revenue tax and customs duties
that would have been waived on the machinery and equipment had these
been imported is given to registered enterprises which purchase them
from a domestic manufacturer
o Exemption from contractors tax
The registered enterprise is exempt from contractors tax
Some stuff from the Bases Conversion and Development Act of 1992 and Special
Economic Zone Act of 1995 (RA 7916, Sec 23-25) these are activity- and location-
driven incentives.
o Fiscal Incentives
Businesses operating within the ECOZONES shall be entitled to fiscal
incentives as per PD 66 (EPZA) or with EO 226.
Exporters using local materials as inputs shall get tax credits same as
those provided in the Export Development Act of 1994
o Exemption from Taxes under the NIRC
No taxes (local & national) shall be imposed on businesses operating
within the ECOZONEs
In lieu of taxes, 5% of the gross income shall be remitted to the national
government
o Applicable national taxes
All income derived by persons and all services establishments in the
ECOZONE are subject to taxes under the Tax Code
Income derived from inside the zones should not be more than
30% of its total income. (RR 2-2005)
o Note: RA 9400 has restored tax privileges to Clark Air Base, Camp John Hay,
Poro Point and Morong Special Eco Zone
In John Hay v Lim, the SC said that Camp John Hay was not afforded tax
privilegs. But RA 9400 has restored it.
Some stuff from the Jewelry Industry Development Act of 1998 (RA 8502) and RR 1-99
o Qualified jewelry enterprises2:
2
Sec. 4. Eligibility for government assistance. To qualify for the assistance, counselling and other incentives
envisioned in this Act, jewelry enterprises availing of the same must be duly registered with the appropriate
government agencies as presently provided by law.
Jewelry enterprise as used in this Act shall refer to any enterprise engaged in any aspect in the manufacture of
goods commonly or commercially known as fine and imitation jewelry including those producing, cutting and
polishing, shaping, refining, forming or fabricating real or imitation pearls, precious and semi-precious stones and
imitations thereof, goods made of precious metal and imitations thereof, and other raw materials and parts used in
the manufacture of jewelry.
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Exempted from excise tax of manufactured and produced jewelries, if
shown to have been purchased from a qualified jewelry enterprise; and
Have additional deduction of 50% for training expenses incurred by
qualified jewelry enterprises.
Jewelry enterprises availing of incentives shall still be eligible to incentives
provided by other special laws such as Republic Act No. 7844 (Export
Development Act of 1994), Republic Act No. 7916 (Special Economic Zone
Act of 1995), Executive Order 226 (BOI Omnibus Investments Code),
among others: Provided, That the activity is export-oriented and that
there is no double availment of the same incentives.
Some stuff from the Cooperative Code of the Philippines (RA 6983) and RR 20-2001
o Cooperatives which transact only with its members are exempt from:
Income tax
Value-Added Tax (VAT) under Section 109 pars. (r), (s), (t) and (u)3
3% Percentage Tax
Donors tax to accredited exempt
Excise tax
DST
But the other party not exempt has to pay the DST
Annual registration fee of P500 under Sec 236 (B)
o If it deals with members and outsiders, see footnote.4
3
Sec 109, (r) Sales by agricultural cooperatives duly registered with the Cooperative Development Authority to
their members as well as sale of their produce, whether in its original state or processed form, to non-members;
their importation of direct farm inputs, machineries and equipment, including spare parts thereof, to be used
directly and exclusively in the production and/or processing of their produce;
(s) Sales by electric cooperatives duly registered with the Cooperative Development authority or National
Electrification Administration, relative to the generation and distribution of electricity as well as their importation of
machineries and equipment, including spare parts, which shall be directly used in the generation and distribution of
electricity;
(t) Gross receipts from lending activities by credit or multi-purpose cooperatives duly registered with the
Cooperative Development Authority whose lending operation is limited to their members;
(u) Sales by non-agricultural, non- electric and non-credit cooperatives duly registered with the Cooperative
Development Authority: Provided, That the share capital contribution of each member does not exceed Fifteen
thousand pesos (P15,000) and regardless of the aggregate capital and net surplus ratably distributed among the
members;
4
For cooperatives with accumulated reserves and undivided net savings of not more than Ten Million Pesos
(P10,000,000.00)
a. Exemption from all national internal revenue taxes for which they are directly liable, as enumerated under Sec.
3.1 of these Regulations.
II. For cooperatives with accumulated reserves and undivided net savings of more than Ten Million Pesos
(P10,000,000.00)
a. Exemption from income tax for a period of ten (10) years from the date of registration with the CDA, provided,
that at least twenty-five percent (25%) of the net income of the cooperative is returned to the members in the
form of interest and/or patronage refund.
For cooperatives whose exemptions were removed by Executive Order No. 93, the ten-year period shall be
reckoned from March 10, 1987 (meaning, tax exemption is valid only until March 10, 1997).
After the lapse of the above ten-year period, they shall be subject to income tax at the full rate on the amount
allocated for interests on capital, provided that the same is not consequently imposed on interest individually
received by members;
The tax base for all cooperatives liable to income tax shall be the net surplus arising from business transactions
with non-members after deducting the amounts for the statutory reserve funds as provided for in the Cooperative
Code and other laws.
b. Exemption from VAT under Section 109 (r), (s), (t) and (u), 3% percentage tax under Section 116, and the
P500.00 annual registration fee imposed under Section 236 (B), all of the Tax Code of 1997;
c. Subject to all other internal revenue taxes unless otherwise provided by law; and
d. Entitled to limited or full deductibility from the gross income of amount donated to duly accredited charitable,
research and educational institutions and reinvestment to socio-economic projects within the area of operation of
the cooperative.
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Taxation One: Outline with Codals
o Note: All income of the cooperative not related to its main/principal business/es
shall be subject to all the appropriate taxes under the Tax Code of 1997. This is
applicable to all types of cooperatives, whether dealing purely with members or
both members and non-members.
o Cooperatives are NOT exempt from
final taxes on deposits, interest income and capital gains tax,
DST if dealing with nonmembers and cooperative exceeding P10m,
VAT billed on certain purchases5
o The exemption of the cooperatives does not extend to their individual members.
Thus, members of cooperatives are liable to pay all the necessary internal
revenue taxes under the National Internal Revenue Code, including the tax on
earnings derived from their capital contribution.
Provided, however, that interests received by members of a cooperative
with accumulated reserves and undivided net savings greater than Ten
Million Pesos (P10,000,000.00), after the lapse of the ten-year exemption,
shall no longer be taxable in the hands of such members.
Some stuff from the Barangay Micro Business Enterprises (BMBEs) (RA 9178 and Dept
Order 17-04)
o BMBEs6 are exempt from income tax.
But not from final taxes on deposits, interest income, capital gains tax,
royalties, etc
Some stuff from the Tourism Act of 2009 (RA 9593 and its IRR)
o Income tax holiday
New enterprises in Greenfield and Brownfield Tourism Zones 6 years
from start of business operations
Existing enterprises in Brownfield Tourism Zones 6 years from time of
completion of expansion or upgrade
The income tax holiday can be extended but note more than 6 years
provided the facilities are upgraded to at least 50% of the original
investment
Special NOLCO rule: carried over for the next 6 consecutive years from
year of loss, provided loss has not been previously offset as a deduction
o Gross income taxation: 5% gross income tax, in lieu of all national internal
revenue taxes and local taxes, impost, assessments, fees and licenses
N. Taxable Income
SEC. 31. Taxable Income Defined. - The term taxable income means the pertinent items of gross income
specified in this Code, less the deductions and/or personal and additional exemptions, if any, authorized for such
types of income by this Code or other special laws.
Gross Income
5
e) VAT billed on purchases of goods and services, except the VAT on the importation by agricultural cooperatives
of direct farm inputs, machineries and equipment, including spare parts thereof, to be used directly and exclusively
in the production and/or processing of their produce, and importation by electric cooperatives of machineries and
equipment, including spare parts, which shall be directly used in the generation and distribution of electricity,
pursuant to Section 109 (r) and (s) of the Tax Code of 1997 but which are not available locally as certified by the
Department of Trade and Industry. All tax-free importations shall not be transferred to any person until five (5)
years, otherwise, the cooperative and the transferee or assignee shall be solidarily liable to pay twice the amount
of the tax and/or the duties thereon;
6
"Barangay Micro Business Enterprise," hereinafter referred to as BMBE, refers to any business entity or enterprise
engaged in the production, processing or manufacturing of products or commodities, including agro-processing,
trading and services, whose total assets including those arising from loans but exclusive of the land on which the
particular business entity's office, plant and equipment are situated, shall not be more than Three Million Pesos
(P3,000,000.00) The Above definition shall be subjected to review and upward adjustment by the SMED Council, as
mandated under Republic Act No. 6977, as amended by Republic Act No. 8289
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Taxation One: Outline with Codals
Less: deductions
Less: Personal exemptions
Taxable income
O. Gross Income
SEC. 32. Gross Income. -
(A) General Definition. - Except when otherwise provided in this Title, gross income means all income derived from
whatever source, including (but not limited to) the following items:
(1) Compensation for services in whatever form paid, including, but not limited to fees, salaries, wages,
commissions, and similar items;
(2) Gross income derived from the conduct of trade or business or the exercise of a profession;
(3) Gains derived from dealings in property;
(4) Interests;
(5) Rents;
(6) Royalties;
(7) Dividends;
(8) Annuities;
(9) Prizes and winnings;
(10) Pensions; and
(11) Partner's distributive share from the net income of the general professional partnership.
Gross income means ALL INCOME derived from WHATEVER SOURCE. This includes, but
is not limited to, the enumeration in the codal.
In answering problems, the first thing you should ask is Is this gross income?, and
then you ask is this excludible? (thats the thought process to follow!)
Compensation
Compensation for services in whatever form paid, including, but not limited to:
o fees,
o salaries,
o wages,
o commissions,
o and similar items.
Compensation earners are not allowed to deduct any other deductions from their salary
o but they may have deductions applied to income earned from other sources.
High-ranking executive was given an apartment where he would host parties for the
clients of his company. He would also travel abroad with his wife to go on meetings. Are
these rental allowances and travel allowances part of the gross income?
o NO.
o Convenience of the employer rule: No part of these redounded to the executives
personal benefit, nor were such amounts retained by him. These bills were paid
directly by the employer-corporation. These expenses are COMPANY EXPENSES,
not income by employees which are subject to tax. (Henderson v Collector)
PERA7 contributions from an employer to an employee do NOT form part of his gross
income. (RR 17-2011 and RA 9505)
Business income
Gross income derived from the conduct of trade or business or the exercise of a
profession
In the case of manufacturing, merchandising or other business, gross income means:
Total Sales
Less: cost of goods sold
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"Personal Equity and Retirement Account (PERA)" refers to the voluntary retirement account established by and
for the exclusive use and benefit of the Contributor for the purpose of being invested solely in PERA investment
products in the Philippines. The Contributor shall retain the ownership, whether legal or beneficial, of funds placed
therein, including all earnings of such funds.
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Add: all income from incidental and outside sources
Gross Income
Gains
Gains derived from dealings in property
Gain or loss on sale or exchange of property is recognized when the property received in
exchange is essentially different from the property disposed and the property received
has market value.
In sale or exchange of real or personal property, distinguish first between ordinary
versus capital assets because capital assets have special rules governing them.
See R and S for more details
Interests
Income from interests are also to be included in computing for the gross income
In the case of 2 or more organizations, trades or businesses (whether organized &
incorporated here or not) are owned or controlled DIRECTLY or INDIRECTLY by the same
interests, the CIR is authorized to distribute, apportion or allocate gross income or
deductions between or among such orgs, trades or businesses, if the CIR determines
that such is necessary in order to prevent tax evasion. (Sec 50, NIRC)
o This is called transfer pricing or imputed interest
o The standard to determine the fairness of related party transactions is the arms
length standard.
It means that there should be no intimacy between the two.
It means that the corporation should deal with the related corporation in
the same manner it would with an uncontrolled taxpayer.
o If a member of a group of controlled entities makes a loan or advances directly or
indirectly to another member of such group and does NOT charge any interest or
charges interest not equal to an arms length, the CIR may make appropriate
allocations to reflect arms length interest rate. (meaning the CIR can come in
and impose an interest on the transaction)
o The arms length interest rate shall be:
The same rate of interest which would have been charged at the time the
indebtedness arose in an independent transaction between unrelated
parties under similar circumstances, or
The Bank Reference rate by the BSP (RMO 63-99)
Rents
Rents are included in the gross income
But what about improvements by lessees? (Section 49, RR 2)
o When a lessee erects a building or makes improvements per agreement with the
lessor, the lessor may report the income therefrom upon either of the follow, at
his option:
At the time when such building or improvements are completed, the fair
market value of such building or improvement
The lessor may spread over the life of the lease the estimated depreciated
value of such building or improvement at the termination of the lease and
report the income for each of the adequate part.
o If the lease is terminated, and it is not through purchase by the lessor, so that
the lessor comes into possession of the property prior to the time originally fixed,
the lessor is considered to receive additional income for that year (if the value of
the building exceeds the amount already reported as income)
No appreciation value due to causes other than premature termination of
the lease shall be included.
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o If the building is destroyed before the expiration of the lease, the lessor is
entitled to deduct as loss for the year when such destruction occurred the
amount previously reported as income, less any salvage value to the extent that
such loss was not compensated by insurance.
o Obligations of lessor to third parties are assumed and paid by the lessee. (?)
o What about advanced rentals?
Royalties
Royalties are any payment of any kind received as consideration for the use of or right
to use:
1. Any patent, trademark, design or model
2. Secret formula or process
3. Industrial, commercial or scientific equipment
4. Information concerning industrial, commercial or scientific experience.
Dividends
Dividends are any distribution whether in cash or in other property in the ordinary
course of business even if extraordinary in amount, made by:
o A domestic or resident foreign corporation
o A joint stock corporation
o A partnership
o A joint account
o An association
o An insurance company
To the shareholders or members out of its earnings or profits.
Tidbits:
o When the corporation receives dividends which are tax-fee (like intercorporate
dividends), it becomes taxable as dividends when it distributes the same to its
shareholders.
o When the dividend is paid by a domestic corporation to a non-resident foreign
corporation, it is taxable in full. (Sec 28 (5b) of NIRC)
General rule: Cash and property dividends are taxable. Stock dividends are not taxable.
Property dividends (or securities other than its own stock) (Section 251, RR 2)
o These are considered income in the amount of the full market value as when
received by the stockholder.
o They are taxed 10%. (or 20% if NRAEB)
o If it was paid in stock of another corporation, it is not considered a stock
dividend.
o The valuation is the market value at the time the dividend becomes payable. (For
shares of stock of another corporation given as dividends, it is the market value
when the shares of stock are received)
Stock dividends
o They are not taxable.
EXCEPT when the stock dividend causes change in the corporate identity
or a change in the nature of the shares issued whereby the proportional
interest of the stockholders after the distribution is essentially different
from his former interest. (Section 252, RR 2)
A stock dividend constitutes income if it gives the shareholder an
interest different from that which his former stock represented.
When a stockholder receives a stock dividend which is taxable
income, the measure of income is the fair market value of the
shares of stock received.
Sale of stock received as dividends (Section 253, RR 2)
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o Once the recipient sells the stock dividend, he may realize gain or loss. This gain
or loss is treated as arising form the sale or exchange of a capital asset.
o Computation of gain or loss (the new basis per share is used in computing any
gain or loss upon any subsequent sale of the shares):
When stock dividend is the same character as the stock upon which it is
paid:
Cost: Old Shares / (total number of old and new shares)
When stock dividend materially differs from stock upon which it is paid:
Cost: Cost of shares of 1 class / number of shares in that class
When stock was purchased at different times and at different prices so
that the identity cannot be determined:
Cost: Presumed to be from stock issued with respect to earliest
purchased stock
Stock declaration and subsequent redemption
o If after the stock dividend declaration, a corporation cancels or redeems the
same in such time and manner as to make the distribution/redemption essentially
equivalent to a distribution of a taxable dividend, the amount received shall be
considered as a taxable dividend (10% final tax for individuals). (Section 254,
RR 2)
Why do corporations do this?
So that the shareholder will avoid paying tax. Remember, stock
dividends are not taxable, but cash dividends are subject to 10%
final tax for individuals (remember your passive income charts!).
So corporations declare stock dividends, and then redeem them
(by giving their shareholders cash) to go around the tax. But
because of the law, their subsequent redemptions are now taxable.
The issuance of stock dividends and its subsequent redemption
must be separate, distinct, and not related, for the redemption to
be considered a legitimate tax scheme.
o Depending on each case, the exempting provision of Sec
83(b) of the 1939 Code (now, Sec 254, RR2), may not be
applicable if the redeemed shares were issued with bona
fide business purpose, which is judged after each and every
step of the transaction have been considered and the whole
transaction does not amount to a tax evasion scheme.
o It is in the issuance of the stocks which are subsequently
redeemed that must have a bona fide business purpose, not
the redemption. The existence of legitimate business
purposes in support of the redemption of stock dividends is
immaterial in income taxation. The test of taxability under
the exempting clause is whether income was realized
through the redemption of stock dividends. (CIR v CA &
Anscor)
In other words, if there was a legitimate business
purpose in issuing the shares, ANSCOR wouldnt
have been taxed for the redemption. But, they failed
to show any business purpose, their actuations were
mere afterthought.
Sources of distribution
o Every distribution is made out of earnings or profits.
o Determine them to be coming from the earnings or profits of the taxable year. If
not, then to the past taxable years. (Section 255, RR 2)
Distribution in liquidation
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o When a corporation distributes all its properties or assets in complete liquidation,
the gain realized from this is taxable.
o Computation is based on Sec 34 (b) or (c) of the Tax Code (Section 256, RR 2)
When a corporation distributes all of its assets in complete dissolution and
liquidation, there is no dividend income to the shareholder receiving the
liquidating dividend. There is, instead, a sale or exchange of property. Any
gain realized or loss sustained by the stockholder, whether individual or
corporate, is taxable income or deductible loss, as the case may be.
When a corporation was dissolved and in process of complete liquidation
and its shareholders surrendered their stock to it and it paid the sums in
question to them in exchange, a transaction took place, which was no
different in its essence from a sale of the same stock to a third party who
paid therefore. (Wise v Meer)
In other words, the gain or loss one incurs when a corporation
liquidates goes into your ordinary income (schedular rate for
individuals, 30% for resident corporations.)
o The 12-month 50%/100% of gains threshold applies (see
below)
Thats the difference between redeemed shares (taxed at 10%)
and liquidating shares (schedular rate for individuals, or 30% for
resident corporations)
For a trading company that is in the process of liquidation, and whose stockholders are
to receive liquidating dividends in excess of their investment, the gain is taxable because
the shareholders will realize capital gain or loss.
o Such gain is the difference between the fair market value of the liquidating
dividends and the adjusted cost to the stockholders of their respective
shareholdings. (BIR Ruling 322-87)
But because of Section 34 (b) of the tax code,
If the shareholder held his shares for more than 12 months, only
50% of the capital gains is taxable.
If less than 12 months, the entire 100% of the capital gains is
taxable.
Annuities
An annuity is a sum of money payable yearly or at regular intervals.
Annuities are tax-exempt.
Pensions
A pension is a gratuity granted as a favor or reward or one paid under given conditions
to a person following retirement from service or to surviving dependents
Pensions are tax-exempt
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SEC. 26. Tax Liability of Members of General Professional Partnerships. - A general professional partnership as such
shall not be subject to the income tax imposed under this Chapter. Persons engaging in business as partners in a
general professional partnership shall be liable for income tax only in their separate and individual capacities.
For purposes of computing the distributive share of the partners, the net income of the partnership shall be
computed in the same manner as a corporation.
Each partner shall report as gross income his distributive share, actually or constructively received, in the net
income of the partnership.
The GPP is tax-exempt, but the income of the individual partners are subject to tax.
o Professional partnerships of real estate brokers are included in this exemption
(Ruling 294-88, July 5, 1988)
Each partner shall report as gross income his distributive share in the net income of the
partnership.
8
SEC. 8. Tax Treatment of Contributions. - The Contributor shall be given an income tax credit equivalent to
five percent (5%) of the total PERA contribution: Provided, however: That in no instance can there be any refund of
the said tax credit arising from the PERA contributions. If the Contributor is an overseas Filipino, he shall be
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Exclusions
Section 32 (B) Exclusions from Gross Income. - The following items shall not be included in gross income and
shall be exempt from taxation under this title:
(1) Life Insurance. - The proceeds of life insurance policies paid to the heirs or beneficiaries upon the death of the
insured, whether in a single sum or otherwise, but if such amounts are held by the insurer under an agreement to
pay interest thereon, the interest payments shall be included in gross income.
(2) Amount Received by Insured as Return of Premium. - The amount received by the insured, as a return of
premiums paid by him under life insurance, endowment, or annuity contracts, either during the term or at the
maturity of the term mentioned in the contract or upon surrender of the contract.
(3) Gifts, Bequests, and Devises. - The value of property acquired by gift, bequest, devise, or descent: Provided,
however, That income from such property, as well as gift, bequest, devise or descent of income from any property,
in cases of transfers of divided interest, shall be included in gross income.
(4) Compensation for Injuries or Sickness. - amounts received, through Accident or Health Insurance or under
Workmen's Compensation Acts, as compensation for personal injuries or sickness, plus the amounts of any
damages received, whether by suit or agreement, on account of such injuries or sickness.
(5) Income Exempt under Treaty. - Income of any kind, to the extent required by any treaty obligation binding
upon the Government of the Philippines.
(6) Retirement Benefits, Pensions, Gratuities, etc.-
(a) Retirement benefits received under Republic Act No. 7641 and those received by officials and employees of
private firms, whether individual or corporate, in accordance with a reasonable private benefit plan maintained by
the employer: Provided, That the retiring official or employee has been in the service of the same employer for at
least ten (10) years and is not less than fifty (50) years of age at the time of his retirement: Provided, further,
That the benefits granted under this subparagraph shall be availed of by an official or employee only once. For
purposes of this Subsection, the term 'reasonable private benefit plan' means a pension, gratuity, stock bonus or
profit-sharing plan maintained by an employer for the benefit of some or all of his officials or employees, wherein
contributions are made by such employer for the officials or employees, or both, for the purpose of distributing to
such officials and employees the earnings and principal of the fund thus accumulated, and wherein its is provided
in said plan that at no time shall any part of the corpus or income of the fund be used for, or be diverted to, any
purpose other than for the exclusive benefit of the said officials and employees.
(b) Any amount received by an official or employee or by his heirs from the employer as a consequence of
separation of such official or employee from the service of the employer because of death sickness or other
physical disability or for any cause beyond the control of the said official or employee.
(c) The provisions of any existing law to the contrary notwithstanding, social security benefits, retirement
gratuities, pensions and other similar benefits received by resident or nonresident citizens of the Philippines or
aliens who come to reside permanently in the Philippines from foreign government agencies and other institutions,
private or public.
(d) Payments of benefits due or to become due to any person residing in the Philippines under the laws of the
United States administered by the United States Veterans Administration.
(e) Benefits received from or enjoyed under the Social Security System in accordance with the provisions of
Republic Act No. 8282.
(f) Benefits received from the GSIS under Republic Act No. 8291, including retirement gratuity received by
government officials and employees.
(7) Miscellaneous Items. -
(a) Income Derived by Foreign Government. - Income derived from investments in the Philippines in loans, stocks,
bonds or other domestic securities, or from interest on deposits in banks in the Philippines by
(i) foreign governments,
(ii) financing institutions owned, controlled, or enjoying refinancing from foreign governments, and
(iii) international or regional financial institutions established by foreign governments.
(b) Income Derived by the Government or its Political Subdivisions. - Income derived from any public utility or
from the exercise of any essential governmental function accruing to the Government of the Philippines or to any
political subdivision thereof.
(c) Prizes and Awards. - Prizes and awards made primarily in recognition of religious, charitable, scientific,
educational, artistic, literary, or civic achievement but only if:
(i) The recipient was selected without any action on his part to enter the contest or proceeding; and
(ii) The recipient is not required to render substantial future services as a condition to receiving the prize or
award.
(d) Prizes and Awards in Sports Competition. - All prizes and awards granted to athletes in local and international
sports competitions and tournaments whether held in the Philippines or abroad and sanctioned by their national
sports associations.
entitled to claim tax credit from any tax payable to the national government under the National Internal Revenue
Code of 1997, as amended.
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(e) 13th Month Pay and Other Benefits. - Gross benefits received by officials and employees of public and private
entities: Provided, however, That the total exclusion under this subparagraph shall not exceed Thirty thousand
pesos (P30,000) which shall cover:
(i) Benefits received by officials and employees of the national and local government pursuant to Republic Act No.
6686;
(ii) Benefits received by employees pursuant to Presidential Decree No. 851, as amended by Memorandum Order
No. 28, dated August 13, 1986;
(iii) Benefits received by officials and employees not covered by Presidential decree No. 851, as amended by
Memorandum Order No. 28, dated August 13, 1986; and
(iv) Other benefits such as productivity incentives and Christmas bonus: Provided, further, That the ceiling of
Thirty thousand pesos (P30,000) may be increased through rules and regulations issued by the Secretary of
Finance, upon recommendation of the Commissioner, after considering among others, the effect on the same of the
inflation rate at the end of the taxable year.
(f) GSIS, SSS, Medicare and Other Contributions. - GSIS, SSS, Medicare and Pag-ibig contributions, and union
dues of individuals.
(g) Gains from the Sale of Bonds, Debentures or other Certificate of Indebtedness. - Gains realized from the same
or exchange or retirement of bonds, debentures or other certificate of indebtedness with a maturity of more than
five (5) years.
(h) Gains from Redemption of Shares in Mutual Fund. - Gains realized by the investor upon redemption of shares
of stock in a mutual fund company as defined in Section 22 (BB) of this Code.
The following are tax-exempt and are NOT included in gross income:
1. Life insurance (except if the proceeds are held by the insurer under an agreement to
pay interest thereon. The interest payments only are included in the gross income)
2. Amount received by insured as return of premium
3. Gifts, bequests, devises or descents (but the income from such property acquired by
these which shall be included in gross income)
4. Compensation for income personal injuries or sickness (plus the amounts of any
damages received on account of such)
5. Income exempt under any treaty
6. Benefits received from the US Veterans Administration
7. Retirement benefits, pensions, gratuities (provided, the retiring person has been in
the service of the same employer for at least 10 years and is not less than 50 years
of age at the time of his retirement. This benefit can only be availed of once) [RA
4917]
8. Separation pay, caused by death, sickness or other disability beyond the control of
the employee (RA 4917)9
Like redundancy, etc
If fault or conduct of employee is to blame, not exempted
9. Social security benefits, retirement gratuities, pensions and similar benefits from
foreign government agencies
10. SSS benefits
11. GSIS benefits
9
Section 1. Any provision of law to the contrary notwithstanding, the retirement benefits received by officials and
employees of private firms, whether individual or corporate, in accordance with a reasonable private benefit plan
maintained by the employer shall be exempt from all taxes and shall not be liable to attachment, garnishment, levy
or seizure by or under any legal or equitable process whatsoever except to pay a debt of the official or employee
concerned to the private benefit plan or that arising from liability imposed in a criminal action: Provided, That the
retiring official or employee has been in the service of the same employer for at least ten (10) years and is not less
than fifty years of age at the time of his retirement: Provided, further, That the benefits granted under this Act
shall be availed of by an official or employee only once: Provided, finally, That in case of separation of an official or
employee from the service of the employer due to death, sickness or other physical disability or for any cause
beyond the control of the said official or employee, any amount received by him or by his heirs from the employer
as a consequence of such separation shall likewise be exempt as hereinabove provided.
As used in this Act, the term "reasonable private benefit plan" means a pension, gratuity, stock bonus or profit
sharing plan maintained by an employer for the benefit of some or all of his officials and employees, wherein
contributions are made by such employer or officials and employees, or both, for the purpose of distributing to
such officials and employees the earnings and principal of the fund thus accumulated, and wherein it is provided in
said plan that at no time shall any part of the corpus or income of the fund be used for, or be diverted to, any
purpose other than for the exclusive benefit of the said officials and employees.
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Minimum wage earners shall be exempt from the payment of income tax too. Holiday
pay, overtime pay, night shift differential pay and hazard pay received by such minimum
wage earners shall likewise be exempt from income tax.
Income from employees trusts are exempt from ALL kinds of taxes, including final
withholding tax on interest income. (CIR v CA & GCL)
Terminal leave pay is not part of gross salary. It is a retirement benefit and is tax
exempt. (CIR v CA & Castaneda, and Request of Atty. Zialcita)
If the employee is separated from a previous employer, but is not employed by another
employer, he shall be refunded or credited the taxes withheld on his exempt 13th month
pay and other benefits by his present employer.
If the employee is separated but has no present job, he shall claim his refund
with the BIR. (RR 2-95 & RMC 36-94)
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benefit furnished to employees and taxable under Subsections (B), (C), (D) and (E) of Section 25 shall be taxed at
the applicable rates imposed thereat: Provided, further, That the grossed -Up value of the fringe benefit shall be
determined by dividing the actual monetary value of the fringe benefit by the difference between one hundred
percent (100%) and the applicable rates of income tax under Subsections (B), (C), (D), and (E) of Section 25.
(B) Fringe Benefit defined.- For purposes of this Section, the term "fringe benefit" means any good, service or
other benefit furnished or granted in cash or in kind by an employer to an individual employee (except rank and file
employees as defined herein) such as, but not limited to, the following:
(1) Housing;
(2) Expense account;
(3) Vehicle of any kind;
(4) Household personnel, such as maid, driver and others;
(5) Interest on loan at less than market rate to the extent of the difference between the market rate and actual
rate granted;
(6) Membership fees, dues and other expenses borne by the employer for the employee in social and athletic clubs
or other similar organizations;
(7) Expenses for foreign travel;
(8) Holiday and vacation expenses;
(9) Educational assistance to the employee or his dependents; and
(10) Life or health insurance and other non-life insurance premiums or similar amounts in excess of what the law
allows.
(C) Fringe Benefits Not Taxable. - The following fringe benefits are not taxable under this Section:
(1) fringe benefits which are authorized and exempted from tax under special laws;
(2) Contributions of the employer for the benefit of the employee to retirement, insurance and hospitalization
benefit plans;
(3) Benefits given to the rank and file employees, whether granted under a collective bargaining agreement or
not; and
(4) De minimis benefits as defined in the rules and regulations to be promulgated by the Secretary of Finance,
upon recommendation of the Commissioner.
The Secretary of Finance is hereby authorized to promulgate, upon recommendation of the Commissioner, such
rules and regulations as are necessary to carry out efficiently and fairly the provisions of this Section, taking into
account the peculiar nature and special need of the trade, business or profession of the employer.
Note: the FBT is paid by the employer.
Fringe benefit is any good, service, or other benefit granted in cash or in kind by an
employer to an employee (except rank & file) such as:
1. Housing
2. Expense account
3. Vehicle of any kind
4. Household personnel, like maids and drivers
5. Interest on loan at less than market rate, to the extent of the difference between the
market rate and the actual rate granted
6. Membership fees, dues & other expenses in social & athletic clubs or similar orgs
7. Expenses for foreign travel
8. Holiday and vacation expenses
9. Educational assistance to the employee or his dependents
10. Life or health insurance & other non-life premiums
This list is not exclusive.
Fringe benefit tax? A final tax of 32% on the grossed up monetary value of fringe
benefits will be imposed.
o The fringe benefit tax on the taxable fringe benefit is computed as follows:
i. Determine the grossed-up monetary value of the fringe benefit. This is the
monetary value of the benefit divided by 68%
ii. Compute the fringe benefit tax by multiplying the grossed-up monetary
value of the fringe benefit by 32%
Actual Monetary Value/68% = Grossed-up Monetary Value
Grossed-up Monetary Value x 32% = FBT
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Received by alien or Filipino employed by a 15%
ROHQ or RAHQ
Received by employees in a special economic 25 % or 15% (depends)
zone
The FBT is also an expense which is deductible from the employers gross income.
o The deduction for the employer is the grossed-up monetary value of the fringe
benefit.
The following fringe benefits are not subject to the FBT:
1. Those that are necessary or required by the trade & business of the employer
2. Those for the convenience or advantage of the employer
3. Those exempt under special laws
4. Contributions to retirement, insurance and hospitalization benefit plans
5. De minimis benefits (these are of relatively small value & are furnished merely as a
means of promoting the health, goodwill of the employees. See RR 8-00 for
examples)
6. Those given to rank & file employees (those who are holding neither managerial nor
supervisory positions)
Clarifications from RR 3-98 (a bit malabo, so check the Reyes book and that excel
reviewer thing)
On housing privileges Monetary Value
If employer leases a residential property for the use of the employee 50% of the
and the property is the usual place of residence of the employee monthly rental
paid
If the employer purchases a residential property on installment basis See page 316 of
and allows the employee to use it as his usual place of residence Reyes
If the employer purchases a residential property and transfers See page 316 of
ownership to the employee Reyes
Housing of military officials Exempt
Housing which is situated inside or adjacent to the premises of a Exempt
business or factory (within 50 meters)
Temporary housing for employee who stays for not more than 3 Exempt
months
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If employer owns & maintains a fleet of vehicles for the use of the 50% of the value
business and the employees
Use of aircraft owned & maintained by the employer Exempt
Use of yacht Value based on
depreciation
Life or Health Insurance, etc Premiums in Excess of What the Monetary Value
Law Allows
If the contribution is pursuant to existing law such as to the GSIS or Exempt
SSS
If it is for the group insurance of the employees Exempt
For the others (household expenses, membership fees & other expenses in social &
athletic clubs, holiday & vacation expenses), these monetary value will be 100% of the
value of the benefit received.
The following are considered de minimis benefits of ALL types of employees. These are
exempt from tax. (RR 8-00)
1. Monetized unused vaction leave, not exceeding 10 days per year
2. Medical cash allowance to dependents of employees not exceeding P750/employee
per sem or P125/month
3. Rice subsidy of P1500 or 1 sack of 50 kg rice per month (sarap!) (RR 5-2008)
4. Uniforms and clothing allowance not exceeding P4,000/month (ubos sa Zara!) (RR 5-
2011)
5. Actual yearly medical benefits not exceeding P10,000/month
6. Laundry allowance not exceeding P300/month
7. Employee achievement awards for length of service or safety achievement in the
form of tangible property with value not exceeding P10,000
8. Flowers, fruits, books given under special circumstances like illness, marriage, birth
of baby
9. Gifts given during Christmas & major anniversaries not exceeding P5,000/year
10. Daily meal allowance for overtime work, not exceeding 25% of the basic minimum
wage
The amount of de minimis benefits is not computed in determining the P30,000 ceiling of
other benefits provided in Sec 32(b) of the Tax Code (see exclusions),
o but if the employer pays MORE than the ceilings prescribed above, the excess is
taxable to the employee ONLY if it is beyond the P30,000 ceiling.
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o In other words, when a benefit is de minimis with a ceiling, the benefit exempt
from the fringe benefit tax is up to the ceiling. Any excess over the ceiling shall
be part of the benefits which are exempt (exclusions from gross income) up to
P30,000.
Any amount given by the employer as benefits, whether de minimis or others, shall be
deductible as business expense. Remember this! (RR 10-00)
To recap:
o Fringe benefit given to rank and file employee is not subject to the fringe benefit
tax.
o Fringe benefit given to a supervisory or managerial employee is subject to the
fringe benefit tax.
o De minimis benefit, whether given to rank and file employee or to supervisory or
managerial employee, is not subject to the fringe benefit tax.
Q. Deductions
SEC. 34. Deductions from Gross Income. - Except for taxpayers earning compensation income arising from
personal services rendered under an employer-employee relationship where no deductions shall be allowed under
this Section other than under subsection (M) hereof, in computing taxable income subject to income tax under
Sections 24 (A); 25 (A); 26; 27 (A), (B) and (C); and 28 (A) (1), there shall be allowed the following deductions
from gross income;
Deductions are amounts allowed by law to reduce the gross income to taxable income.
These amounts are allowed to taxpayers by legislative grace and the taxpayer claiming
them must prove compliance with the provisions of the law authorizing the deductions.
The following are the deductions from gross income:
o For individuals with gross compensation income (from employer-employee
relationship) only:
i. Premium payments on health and/or hospitalization insurance (PHHI)
ii. Personal exemptions
o For individuals with gross income from business or practice of profession:
i. Optional standard deduction (OSD), or
ii. Itemized deductions,
iii. PHHI,
iv. Personal exemptions.
o For corporations:
i. Optional standard deduction (OSD), or
ii. Itemized deductions
Itemized deductions are expenses and losses related to trade or business or the practice
of a profession.
o Itemized deductions are what Sec. 34 talks about, and these do not apply to
taxpayers earning compensation income from an employer-employee
relationship.
The following are the itemized deductions:
1. Expenses
2. Interest
3. Taxes
4. Losses
5. Bad debts
6. Depreciation
7. Depletion
8. Charitable and other contributions
9. Research and development
10. Pension trusts
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Expenses, in general
(A) Expenses. -
(1) Ordinary and Necessary Trade, Business or Professional Expenses.-
(a) In General. - There shall be allowed as deduction from gross income all the ordinary and necessary expenses
paid or incurred during the taxable year in carrying on or which are directly attributable to, the development,
management, operation and/or conduct of the trade, business or exercise of a profession, including:
(i) A reasonable allowance for salaries, wages, and other forms of compensation for personal services
actually rendered, including the grossed-up monetary value of fringe benefit furnished or granted by the employer
to the employee: Provided, That the final tax imposed under Section 33 hereof has been paid;
(ii) A reasonable allowance for travel expenses, here and abroad, while away from home in the pursuit of
trade, business or profession;
(iii) A reasonable allowance for rentals and/or other payments which are required as a condition for the
continued use or possession, for purposes of the trade, business or profession, of property to which the taxpayer
has not taken or is not taking title or in which he has no equity other than that of a lessee, user or possessor;
(iv) A reasonable allowance for entertainment, amusement and recreation expenses during the taxable
year, that are directly connected to the development, management and operation of the trade, business or
profession of the taxpayer, or that are directly related to or in furtherance of the conduct of his or its trade,
business or exercise of a profession not to exceed such ceilings as the Secretary of Finance may, by rules and
regulations prescribe, upon recommendation of the Commissioner, taking into account the needs as well as the
special circumstances, nature and character of the industry, trade, business, or profession of the taxpayer:
Provided, That any expense incurred for entertainment, amusement or recreation that is contrary to law, morals
public policy or public order shall in no case be allowed as a deduction.
(b) Substantiation Requirements. - No deduction from gross income shall be allowed under Subsection (A) hereof
unless the taxpayer shall substantiate with sufficient evidence, such as official receipts or other adequate records:
(i) the amount of the expense being deducted, and
(ii) the direct connection or relation of the expense being deducted to the development, management,
operation and/or conduct of the trade, business or profession of the taxpayer.
(c) Bribes, Kickbacks and Other Similar Payments. - No deduction from gross income shall be allowed under
Subsection (A) hereof for any payment made, directly or indirectly, to an official or employee of the national
government, or to an official or employee of any local government unit, or to an official or employee of a
government-owned or -controlled corporation, or to an official or employee or representative of a foreign
government, or to a private corporation, general professional partnership, or a similar entity, if the payment
constitutes a bribe or kickback.
(2) Expenses Allowable to Private Educational Institutions. - In addition to the expenses allowable as deductions
under this Chapter, a private educational institution, referred to under Section 27 (B) of this Code, may at its
option elect either: (a) to deduct expenditures otherwise considered as capital outlays of depreciable assets
incurred during the taxable year for the expansion of school facilities or (b) to deduct allowance for depreciation
thereof under Subsection (F) hereof.
The codal considers as deductions all ordinary and necessary expenses in carrying on
the development, management, and operation of a trade, business or profession,
including a reasonable allowance for:
1. Salaries, wages, and other forms of compensation including fringe benefits
2. Travel expenses, here and abroad, in pursuit of trade and business
3. Rentals and others which are required for the continued use of property
4. Entertainment, amusement and recreation expenses that are directly connected to
the trade, business, or profession (but should not be contrary to law, morals, etc)
According to the codal, these are the requirements for deductible claims:
1. Sufficient evidence (like official receipts)
2. A direct connection of the expense to the development, management, operation,
and/or conduct of the trade, business or profession
Payments of bribes & kickbacks are not deductible.
Jurisprudence expounded on the requirements with the following requisites for the
deductibility of ordinary and necessary trade, business, or professional expenses (CIR v
Isabela):
1. Expense must be ordinary and necessary
2. Must have been paid or incurred during the taxable year
3. Must have been paid or incurred in carrying on the trade/business
4. Must be supported by receipts, records or other pertinent papers
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A taxpayer who is authorized to deduct certain expenses and other allowable deductions
for the current year but failed to do so cannot deduct the same for the next year.
It is ordinary when it is normal in relation to the business of the taxpayer. It need not be
recurring.
It is necessary when it is appropriate and helpful in the development of the taxpayers
business. See if it is intended to minimize losses, or to maximize profits.
Regarding advertising expenses (CIR v General Foods):
o Advertising is generally of two kinds:
i. To stimulate the current sale of merchandise or use of services
ii. To stimulate the future sale of merchandise or use of services
o The second type involves expenditures incurred, in whole or in part, to create or
maintain some form of goodwill for the taxpayers trade or business or for the
industry or profession of which the taxpayer is a member.
o If its the first kind, its definitely deductible as a business expense, the only
question to be answered is if its reasonable or not.
o If its the second kind, normally they should be spread out over a reasonable
time.
o In the case, the amount was not only huge (ie unreasonable), but was also used
to protect the brand franchise. The Supreme Court said that it was analogous to
the maintenance of goodwill or title to ones property. Thus, it was a capital
expenditure which should have been spread out over a reasonable period of time.
It was akin to the acquisition of capital assets and therefore expenses related
thereto were not to be considered as business expenses but as capital
expenditures.
Expenses paid to advertising firms to promote sale of capital stock for acquisition of
additional capital is not deductible from taxable income. Efforts to establish reputation
are akin to acquisition of capital assets, and therefore, expenses related thereto are not
business expense but capital expenditures. (Atlas Consolidated v CIR)
Litigation expenses incurred in defense of title to property is capital in nature and not
deductible. (Atlas)
Bonuses to employees made in good faith and as additional compensation for the
services actually rendered by the employees are deductible, provided such payments,
when added to the stipulated salaries, do not exceed a reasonable compensation for the
services rendered. (Kuenzle v CIR)
o Bonus given to corporate officers out of sale of corporate land not deductible as
an ordinary business expenses in the absence of showing what role said officers
performed to effectuate said sale. The taxpayer must show that personal services
had been rendered and that the amount was reasonable. (Aguinaldo Industries v
CIR)
o For income tax purposes, the employer cannot legally claim such bonuses as
deductible expenses unless they are shown to be reasonable. The conditions
precedent to the deduction of bonuses are:
1. The payment of the bonuses is in fact compensation
2. It must be for personal services actually rendered, and
3. The bonuses, when added to the salaries, are reasonable when measured by
the amount and quality of the services performed with relation the business
of the taxpayer. (CM Hoskins v CIR)
Contributions to a private entity that gives dividends to stockholders not deductible
because the net income of the recipient inures to the benefit of its stockholders.
o Contributions to a government entity is deductible when used exclusively for
public purposes (Roxas v CTA)
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Payment for police protection is illegal as it is a compensation given by the petitioner to
the police for the performance by the latter of the functions required of them to be
rendered by law. (Calanoc v CIR)
For cost of materials, taxpayers carrying materials and supplies on hand should include
in expenses the charges of materials and supplies only to the amount that they are
actually consumed and used in operation during the year for which the return is made,
provided that the cost of such materials and supplies has not been deducted in
determining the net income for any previous year.
o If a taxpayer carries incidental materials or supplies on hand for which no record
of consumption is kept or of which physical inventories at the beginning and end
of the year are not taken, it will be permissible for the taxpayer to include in his
expenses and deduct from gross income the total cost of such supplies and
materials as were purchased during the year for which the return is made,
provided the net income is clearly reflected by this method. (Sec 67, RR 2)
For repairs, the cost of incidental repairs which neither materially add to the value of the
property nor appreciably prolong its life, but keep it in an ordinarily efficient operating
condition, may be deducted as expense, provided the plant or property account is not
increased by the amount of such expenditure.
o Repairs in the nature of replacement, to the extent that they arrest deterioration
and appreciably prolong the life of the property should be charged against the
depreciation reserves if such account is kept. (Sec 68, RR 2)
For lease agreement expenses, the following are allowed deductions (Sec 74, RR 2):
o Where a leasehold is acquired for business purposes for a specified sum, the
purchaser may take deduction in his return for an aliquot part of such sum each
year, based on the number of years the lease will run;
o Taxes paid by a tenant to or for a landlord for business property are additional
rent and constitute a deductible item to the tenant and taxable income to the
landlord; the amount of the tax being deductible by the latter.
o The cost of leasehold improvements are NOT considered business expenses since
they are capital investments.
i. In order to return to such taxpayer his investment of capital, an annual
deduction may be made from gross income of an amount equal to the cost
of such improvements divided by the number of years remaining of the
term of the lease, and such deduction shall be in lieu of a deduction for
depreciation. If the remainder of the term of lease is greater than the
probable life of the building erected, or of the improvements made, this
deduction shall take the form of an allowance for depreciation.
For professional expenses, the following are allowed deductions (Sec 69, RR 2):
o Cost of supplies
o Expenses paid in the operation and repair of transportation equipment used in
making professional class
o Due to professional societies and subscriptions to professional journals
i. So bar review tuition fees and bar examination fees paid are not
deductible
o Rent paid for offices
o Expenses for utilities on offices
o Expenses for hiring of office assistants
o Books, furniture and professional instruments and equipment with a SHORT
useful life
i. Those with a permanent character are NOT allowable
Professional expenses are deductible in the year the professional services are rendered,
not in the year they are billed. (Mamalateo)
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For farmer who operates for a profit, they can deduct necessary expenses all amounts
actually expended in the carryon on of the business of farming.10
Private educational institutions have special deductibles.:
1. They are allowed to deduct expenditures otherwise considered as capital outlays of
depreciable assets incurred for the expansion of school facilities, or
2. They are allowed to capitalize the expenditure, and claim deduction by way of
depreciation.
10
The cost of ordinary tools of short life or small cost, such as hand tools, including shovels, rakes, etc., may be
included. The cost of feeding and raising livestock may be treated as an expense deduction, in so far as such cost
represents actual outlay, but not including the value of farm produce grown upon the far, or the laborer of the
taxpayer. Where a farmer is engaged in producing crops which take more than a year from the time of planting to
the process of gathering and disposal, expenses deducted may be determined upon the crop basis, and such
deductions must be taken in the year in which the gross income from the crop has been realized. The cost of farm
machinery, equipment, and farm buildings represents a capital investment and is not allowable deduction as an
item of expense. Amounts expended in the development of farms, orchards, and ranches, prior to the time when
the productive state is reached may be regarded as investments of capital. Amounts expended in purchasing work,
breeding or dairy animals are regarded as investments of capital, and may be depreciated unless such animals are
included in an inventory in accordance with section 149 of these regulations. The purchase price of transportation
equipment if used wholly used in carrying on farm operations, is not deductible but is regarded as an investment of
capital. The cost of gasoline or fuel, repairs, and upkeep of the transportation equipment if used wholly in the
business of farming is deductible as an expense; if used partly for business purposes and partly for the pleasure or
convenience of the taxpayer or his family, such cost may be apportioned according to the extent of the use for
purposes of business and pleasure or convenience, and only the proportion of such cost justly attributable to
business purposes is deductible as a necessary expense. If a farm is operated for recreation or pleasure and not on
a commercial basis, and if the expenses incurred in connection with the farm are in excess of the receipt
therefrom, the entire receipts from the sale of products may be ignored in rendering a return of income, and the
expenses incurred, being regarded as personal expenses, will not constitute allowable deduction.
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o BUT! These may still be qualified as deductions under other provisions of Section
34.
o Possible legal implication? They wont be subject to the ceiling of representation
expenses (my opinion lang ah!)
Requisites of deductibility for entertainment, amusement, and recreational expense:
1. Paid or incurred during the taxable year
2. Must be directly connected to the development, management & operation of
the trade, biz or profession of the taxpayer; or directly related to or in
furtherance of, his or its trade, biz or exercise of profession
3. Not be contrary to blah blah blah
4. Not been paid to an official of the government as a bribe or kickback
5. Must be substantiated by adequate proof
6. Must been withheld, if applicable, and paid to the BIR
Ceiling for Representation, Entertainment and Amusement Expenses
Taxpayers engaged in sale of goods or properties 0.5% of net sales
Taxpayers engaged in sale of services, including exercise of 1% of net revenue
profession and use or lease of properties
For constructive dividends, see footnote.11
o Sorry, pagod na!
Interests
(B) Interest.-
(1) In General. - The amount of interest paid or incurred within a taxable year on indebtedness in connection with
the taxpayer's profession, trade or business shall be allowed as deduction from gross income: Provided, however,
That the taxpayer's otherwise allowable deduction for interest expense shall be reduced by 42% of the interest
income subject to final tax: Provided, that effective January 1, 2009, the percentage shall be 33%.
(2) Exceptions. - No deduction shall be allowed in respect of interest under the succeeding subparagraphs:
(a) If within the taxable year an individual taxpayer reporting income on the cash basis incurs an indebtedness on
which an interest is paid in advance through discount or otherwise: Provided, That such interest shall be allowed a
a deduction in the year the indebtedness is paid: Provided, further, That if the indebtedness is payable in periodic
11
Sec. 70, RR-2
Sec. 70. Compensation for personal services. Among the ordinary and necessary expenses paid or incurred in
carrying on any trade or business may be included a reasonable allowance for salaries or other compensation for
personal services actually rendered. The test of deductibility in the case of compensation payments is whether they
are reasonable and are, in fact, payments purely for service. This test and its practical application may be further
stated and illustrated as follows:
(1) Any amount paid in the form of compensation, but not in fact as the purchase price services, is not deductible.
(a) an ostensible salary paid by a corporation may be a distribution of dividend on stock. This is likely to occur in
the case of a corporation having few shareholders, practically all of whom draw salaries. If in such a case the
salaries are in excess of those ordinarily paid for similar services, and the excessive payment correspond or bear a
close relationship to the stockholder of the officers or employees, it would seem likely that the salaries are not paid
wholly for services rendered, but that the excessive payments are a distribution of earnings upon the stock. (b) An
ostensible salary may be in part payment for property. This may occur, for example, where a partnership sells out
to a corporation, the former partners agreeing to continue in the service of the corporation. In such a case it may
be found that the salaries of the former partners are not merely for services, but in part constitute payment for the
transfer of their business.
(2) The form or method of fixing compensation is not decisive as to the deductibility. While any form of contingent
compensation invites scrutiny as a possible distribution of earnings of the enterprise, it does not follow that
payments on a continent basis are to be treated fundamentally on any basis different from that applying to
compensation at a flat rate. Generally speaking, if contingent compensation is paid pursuant to a free bargain
between the employer and the individual made before the services are rendered, not influenced by any
consideration on the part of the employer other than that of securing on fair and advantageous terms the services
of the individual, it should be allowed as a deduction even though in the actual working out of the contract it may
prove to be greater than the amount which would ordinarily be paid.
(3) In any event the allowance for compensation paid may not exceed what is reasonable in all the circumstances.
It is in general just to assume that reasonable and true compensation is only such amount as would ordinarily be
paid for like services by like enterprises in like circumstances. The circumstances to be taken into consideration are
those existing at the date when the contract for services was made, not those existing at the date when the
contract is questioned.
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amortizations, the amount of interest which corresponds to the amount of the principal amortized or paid during
the year shall be allowed as deduction in such taxable year;
(b) If both the taxpayer and the person to whom the payment has been made or is to be made are persons
specified under Section 36 (B); or
(c)If the indebtedness is incurred to finance petroleum exploration.
(3) Optional Treatment of Interest Expense. - At the option of the taxpayer, interest incurred to acquire property
used in trade business or exercise of a profession may be allowed as a deduction or treated as a capital
expenditure.
Interests paid on debts are allowed as deductions but:
o These must be incurred in connection with the taxpayers profession, trade or biz
o The allowable deduction is only 33% of the interest income subject to final tax.
(more on this below)
Requisites for deductibility of interest expense (RR 13-00):
1. There must be an indebtedness
2. There should be an interest expense paid or incurred upon the indebtedness
(incurred meaning that it was due and demandable)
3. The indebtedness must be that of the taxpayer
4. It must be connected with the taxpayers trade, biz or profession
5. The interest expense must have been paid or incurred during the taxable year
6. The interest must have been stipulated in writing
7. The interest must be legally due
8. The interest payment arrangement must not be between related taxpayers
9. The interest must not be incurred to finance petroleum operations
10. In case the interest was incurred to acquire property used in trade, biz or profession,
it was not treated as capital expenditure.
o In cases like this, the axpayer has the option to treat it as either
i. interest expense deductible in full or
ii. as a capital expenditure and claim as deduction only the periodic
amortization/depreciation.
o But he can only choose one, or else double deduction, that aint allowed. (Sec 34
(B.3), and Picop V CA where the SC allowed interest expense on a loan to buy
machinery as deductible.)
Interest is not deductible if:
o Both the taxpayer and the person to whom interest was paid are related
taxpayers, meaning:
i. Members of a family
ii. An individual and a corp where more than 50% of the outstanding stock of
the corp is owned by the individual
iii.Two corps where more than 50% of the outstanding stock of each is owned
by the other or by the same individual
iv. Between grantor and fiduciary of any trust
v. Between fiduciary of a trust and the fiduciary of another trust if the same
person is a grantor with respect to each trust
vi. Between fiduciary of a trust and the beneficiary
If an individual is on the cash basis of accounting, interest paid in advance, through
discount or otherwise, shall be allowed as deduction not in the year that the interest was
paid in advance, but in the year that the indebtedness was paid.
o But if the indebtedness is payable in periodic amortization, the amount of the
interest which corresponds to the amount of the principal amortized or paid
during the year shall be allowed as deduction in such taxable year.
Late payment of tax is considered a debt, and therefore interest on taxes is interest on
indebtedness and is thus deductible. (CIR v de Prieto)
If a taxpayer has interest income subject to final tax, the otherwise allowable deduction
for interest expense shall be reduced by an amount equal to 33% of interest income
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subjected to final tax. This 33% rule will only apply if there is interest income subject to
final tax. If none, then you can deduct in full.
The law assumes that the money borrowed is used to reinvest, legitimate business
purpose is irrelevant. (Atty. Montero)
The law effectively cancelled out the tax arbitrage advantage. Corporations before would
borrow money and use the interest they had to pay as a deduction, even if they
reinvested the money elsewhere and got interest income.
For example, Juan borrowed money from BPI. It had an interest expense of P8,000. He
then deposited the money that he borrowed with HSBC, and it had an interest income on
it of P9000 (net already of the 20% final tax). How much is his deducible interest
expense? (p. 209, Reyes)
Interest expense, unadjusted P8,000
Less: Adjustment for interest
Income subject to final tax
(33% of P9,000) 2,970
Adjusted balance, deduction for interest expense P5,030
Taxes
(C) Taxes.-
(1) In General. - Taxes paid or incurred within the taxable year in connection with the taxpayer's profession, trade
or business, shall be allowed as deduction, except
(a) The income tax provided for under this Title;
(b) Income taxes imposed by authority of any foreign country; but this deduction shall be allowed in the case of a
taxpayer who does not signify in his return his desire to have to any extent the benefits of paragraph (3) of this
subsection (relating to credits for taxes of foreign countries);
(c) Estate and donor's taxes; and
(d) Taxes assessed against local benefits of a kind tending to increase the value of the property assessed.
Provided, That taxes allowed under this Subsection, when refunded or credited, shall be included as part of gross
income in the year of receipt to the extent of the income tax benefit of said deduction.
(2) Limitations on Deductions. - In the case of a nonresident alien individual engaged in trade or business in the
Philippines and a resident foreign corporation, the deductions for taxes provided in paragraph (1) of this Subsection
(C) shall be allowed only if and to the extent that they are connected with income from sources within the
Philippines.
(3) Credit Against Tax for Taxes of Foreign Countries. - If the taxpayer signifies in his return his desire to have the
benefits of this paragraph, the tax imposed by this Title shall be credited with:
(a) Citizen and Domestic Corporation. - In the case of a citizen of the Philippines and of a domestic corporation, the
amount of income taxes paid or incurred during the taxable year to any foreign country; and
(b) Partnerships and Estates. - In the case of any such individual who is a member of a general professional
partnership or a beneficiary of an estate or trust, his proportionate share of such taxes of the general professional
partnership or the estate or trust paid or incurred during the taxable year to a foreign country, if his distributive
share of the income of such partnership or trust is reported for taxation under this Title.
An alien individual and a foreign corporation shall not be allowed the credits against the tax for the taxes of foreign
countries allowed under this paragraph.
(4) Limitations on Credit. - The amount of the credit taken under this Section shall be subject to each of the
following limitations:
(a) The amount of the credit in respect to the tax paid or incurred to any country shall not exceed the same
proportion of the tax against which such credit is taken, which the taxpayer's taxable income from sources within
such country under this Title bears to his entire taxable income for the same taxable year; and
(b) The total amount of the credit shall not exceed the same proportion of the tax against which such credit is
taken, which the taxpayer's taxable income from sources without the Philippines taxable under this Title bears to
his entire taxable income for the same taxable year.
(5) Adjustments on Payment of Incurred Taxes. - If accrued taxes when paid differ from the amounts claimed as
credits by the taxpayer, or if any tax paid is refunded in whole or in part, the taxpayer shall notify the
Commissioner; who shall redetermine the amount of the tax for the year or years affected, and the amount of tax
due upon such redetermination, if any, shall be paid by the taxpayer upon notice and demand by the
Commissioner, or the amount of tax overpaid, if any, shall be credited or refunded to the taxpayer. In the case of
such a tax incurred but not paid, the Commissioner as a condition precedent to the allowance of this credit may
require the taxpayer to give a bond with sureties satisfactory to and to be approved by the Commissioner in such
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sum as he may require, conditioned upon the payment by the taxpayer of any amount of tax found due upon any
such redetermination. The bond herein prescribed shall contain such further conditions as the Commissioner may
require.
(6) Year in Which Credit Taken. - The credits provided for in Subsection (C)(3) of this Section may, at the option of
the taxpayer and irrespective of the method of accounting employed in keeping his books, be taken in the year
which the taxes of the foreign country were incurred, subject, however, to the conditions prescribed in Subsection
(C)(5) of this Section. If the taxpayer elects to take such credits in the year in which the taxes of the foreign
country accrued, the credits for all subsequent years shall be taken upon the same basis and no portion of any
such taxes shall be allowed as a deduction in the same or any succeeding year.
(7) Proof of Credits. - The credits provided in Subsection (C)(3) hereof shall be allowed only if the taxpayer
establishes to the satisfaction of the Commissioner the following:
(a) The total amount of income derived from sources without the Philippines;
(b) The amount of income derived from each country, the tax paid or incurred to which is claimed as a credit under
said paragraph, such amount to be determined under rules and regulations prescribed by the Secretary of Finance;
and
(c) All other information necessary for the verification and computation of such credits.
Taxes paid or accrued within the taxable year in connection with the taxpayers trade or
business or exercise of a profession are deductible from gross income.
o EXCEPT: (Sec 82-83, RR 2)
i. Philippine income tax (but the fringe benefit tax can be deducted!)
ii. Estate tax
iii. Donors tax
iv. Special assessment (see footnote)12
v. Income tax imposed by a foreign country for income sourced outside the
Philippines (but it shall be allowed if the taxpayer does not signify his
desire to enjoy any benefits of the tax credit for taxes paid to foreign
countries)
vi. Stock transaction tax
vii. VAT on business (last two exceptions cited by Reyes, p. 212)
Income, war-profits, and excess-profits taxes imposed by the authority of a foreign
country (including the United States and possessions thereof) are allowed as deductions
only if the taxpayer does not signify in his return his desire to have to any extent the
benefits of the provisions of law allowing credits against the tax for taxes of foreign
countries. (Sec 82, RR 2)
With regard to tax credits, only resident citizens and domestic corporations are affected
by this, because they are only ones taxed worldwide. When a taxpayer is qualified for a
credit, he has the option of either:
o Deducting the foreign income tax from his gross income, or
o Claiming the tax credit.
How do we determine the amount of tax to be credited? Just follow the formulas below,
and choose which of them is lower!
1. Net income from foreign country x Taxes paid in the RP = ______
Net income worldwide
Example
12
A tax is considered assessed against local benefits when the property subject to the tax is limited to the property
benefited. Special assessments are not deductible, even though an incidental benefit may inure to the public
welfare. The taxes deductible are those levied for the general public welfare, by the proper taxing authorities at a
like rate against all property in the territory over which such authorities have jurisdiction. When assessments are
made for the purpose of maintenance or repair of local benefits, the taxpayer may deduct assessments paid as an
expense incurred in business, if the payment of such assessments is necessary to the conduct of his business.
When the assessments are made for the purpose of constructing local benefits, the payments by the taxpayer are
in the nature of capital expenditures and are not deductible. Where assessments are made for the purpose of both
construction and maintenance or repairs, the burden is on the taxpayer to show the allocation of the amounts
assessed to the different purposes. If the allocation can not be made, none of the amounts so paid is deductible.
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Blessings had a taxable income from the Philippines of P300,000 and from the US of
P100,000. An income tax of P40,000 was paid to the US. If Blessings chose to take a tax
credit for the income tax paid to the States, how much tax does he have to pay the
Philippine government after the tax credit would have been computed?
Line everything up and know the taxable income worldwide and the total taxes paid
here!
Taxable income before tax credit, USA P100,000
Taxable income before tax credit, Phil P300,000
Taxable income, worldwide P400,000
Corporate income tax of 30% P120,000
Less: Tax credit for foreign tax
Plug in the values!
(100,000/400,000) x 120,000 = P30,000
Foreign income tax paid = P40,000
Choose whats lower! Allowed tax credit P 30,000
Philippine income tax still due P 90,000
What would Blessings bring home if they chose to do the tax credit?
Taxable income, worldwide P400,000
P 90,000
P310,000
Losses
(D) Losses. -
(1) In General.- Losses actually sustained during the taxable year and not compensated for by insurance or other
forms of indemnity shall be allowed as deductions:
(a) If incurred in trade, profession or business;
(b) Of property connected with the trade, business or profession, if the loss arises from fires, storms, shipwreck, or
other casualties, or from robbery, theft or embezzlement.
The Secretary of Finance, upon recommendation of the Commissioner, is hereby authorized to promulgate rules
and regulations prescribing, among other things, the time and manner by which the taxpayer shall submit a
declaration of loss sustained from casualty or from robbery, theft or embezzlement during the taxable year:
Provided, however, That the time limit to be so prescribed in the rules and regulations shall not be less than thirty
(30) days nor more than ninety (90) days from the date of discovery of the casualty or robbery, theft or
embezzlement giving rise to the loss.
(c) No loss shall be allowed as a deduction under this Subsection if at the time of the filing of the return, such loss
has been claimed as a deduction for estate tax purposes in the estate tax return.
(2) Proof of Loss. - In the case of a nonresident alien individual or foreign corporation, the losses deductible shall
be those actually sustained during the year incurred in business, trade or exercise of a profession conducted within
the Philippines, when such losses are not compensated for by insurance or other forms of indemnity. The Secretary
of Finance, upon recommendation of the Commissioner, is hereby authorized to promulgate rules and regulations
prescribing, among other things, the time and manner by which the taxpayer shall submit a declaration of loss
sustained from casualty or from robbery, theft or embezzlement during the taxable year: Provided, That the time
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to be so prescribed in the rules and regulations shall not be less than thirty (30) days nor more than ninety (90)
days from the date of discovery of the casualty or robbery, theft or embezzlement giving rise to the loss; and
Losses actually sustained during the taxable year and not compensated by insurance or
other form of indemnity are deductible from gross income:
o If incurred in trade, biz or profession;
o Of property connected with trade, biz or profession, if the loss arises from fire,
storm, shipwreck or other casualty, or from robbery, theft or embezzlement.
For non-resident individuals and foreign corporations, the losses should be those actually
sustained during the taxable year, incurred in trade, biz or profession conducted within
the Philippines.
If the loss has already been claimed as deduction for estate tax purposes, it is no longer
deductible from gross income.
Casualty means the complete or partial destruction of property resulting from an
identifiable event of a sudden, unexpected or unusual nature. The taxpayer bears the
burden of proof. (RR 12-77)
Special rules on losses:
o Voluntary removal of buildings (Sec 97, RR 2):
i. Loss due to the voluntary removal or demolition of old buildings, the
scrapping of old machinery, equipment, etc., incident to renewals and
replacements will be deductible from gross income.
ii. When a taxpayer buys real estate upon which is located a building, which
he proceeds to raze with a view to erecting thereon another building, it
will be considered that the taxpayer has sustained no deductible expense
on account of the cost of such removal, the value of the real estate,
exclusive of old improvements, being presumably equal to the purchase
price of the land and building plus the cost of removing the useless
building.
o Loss of useful value of assets (Sec 98, RR 2):
i. When through some change in business conditions, the usefulness in the
business of some or all of the capital assets is suddenly terminated, so
that the taxpayer discontinues the business or discards such assets
permanently from use of such business, he may claim as deduction the
actual loss sustained.
In determining the amount of the loss, adjustment must be made,
however, for improvements, depreciation and the salvage value of
the property.
This exception to the rule requiring a sale or other disposition of
property in order to establish a loss requires proof of some
unforeseen cause by reason of which the property has been
prematurely discarded, as, for example, where an increase in the
cost or change in the manufacture of any product makes it
necessary to abandon such manufacture, to which special
machinery is exclusively devoted, or where new legislation directly
or indirectly makes the continued profitable use of the property
impossible.
This exception does NOT extend to a case where the useful life of
property terminates solely as a result of those gradual processes
for which depreciation allowance are authorized. It does not apply
to inventories or to other than capital assets. The exception applies
to buildings only when they are permanently abandoned or
permanently devoted to a radically different use, and to machinery
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only when its use as such is permanently abandoned. Any loss to
be deductible under this exception must be charged off in the
books and fully explained in returns of income.
o Shrinkage in value of stocks (Sec 99, RR 2):
i. A person possessing stock of a corporation can not deduct from gross
income any amount claimed as a loss merely on account of shrinkage in
value of such stock through fluctuation of the market or otherwise.
The loss allowable in such case is that actually suffered when the
stock is disposed of.
ii. If stock of a corporation becomes worthless, its cost or other basis
determined in accordance with these regulations may be deducted by the
owner in the taxable year in which the stock became worthless, provided a
satisfactory showing of its worthlessness be made, as in the case of bad
debts.
NOLCO
(3) Net Operating Loss Carry-Over. - The net operating loss of the business or enterprise for any taxable year
immediately preceding the current taxable year, which had not been previously offset as deduction from gross
income shall be carried over as a deduction from gross income for the next three (3) consecutive taxable years
immediately following the year of such loss: Provided, however, That any net loss incurred in a taxable year during
which the taxpayer was exempt from income tax shall not be allowed as a deduction under this Subsection:
Provided, further, That a net operating loss carry-over shall be allowed only if there has been no substantial change
in the ownership of the business or enterprise in that -
(i) Not less than seventy-five percent (75%) in nominal value of outstanding issued shares., if the business is in
the name of a corporation, is held by or on behalf of the same persons; or
(ii) Not less than seventy-five percent (75%) of the paid up capital of the corporation, if the business is in the
name of a corporation, is held by or on behalf of the same persons.
For purposes of this subsection, the term "not operating loss" shall mean the excess of allowable deduction over
gross income of the business in a taxable year.
Provided, That for mines other than oil and gas wells, a net operating loss without the benefit of incentives
provided for under Executive Order No. 226, as amended, otherwise known as the Omnibus Investments Code of
1987, incurred in any of the first ten (10) years of operation may be carried over as a deduction from taxable
income for the next five (5) years immediately following the year of such loss. The entire amount of the loss shall
be carried over to the first of the five (5) taxable years following the loss, and any portion of such loss which
exceeds, the taxable income of such first year shall be deducted in like manner form the taxable income of the next
remaining four (4) years.
Net operating loss is the excess of allowable deduction over gross income of the
business in a taxable year.
o NOLCO: The net operating loss of the business which has not been previously
offset as deduction shall be carried over as deduction from gross income for the
next 3 consecutive years immediately following the year of such loss
o This is allowed if there has been no substantial change in ownership of the
business, meaning
i. Where not less than 75% of outstanding shares in the business is in the
name of a corporation held by the same persons, or
ii. Where not less than 75% of the paid-up capital of the corporation is held
by the same persons
o For mines other than oil and gas wells, a net operating loss without the benefit of
incentives provided for by the Omnibus Investments Code may be carried over as
deduction for the next 5 years immediately following the year of loss
NOLCO is allowed regardless of the change in the ownership of a company in case of a
merger where the taxpayer who accumulated the NOLCO is the surviving entity
If the NOLCO arises from a merger, consolidation or combination, the
transferee/assignee is not entitled to cleaim the same NOLCO as deduction unless the
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transferor gains control of at least 75% of he outstanding issues or paid0up capital of
the transferee.
NOLCO is not transferable or assignable to another person EXCEPT if there has been no
substantial change in the ownership of the business in that not less than 75% of the
paid-up capital of the business is held by the same folk
An individual who claims the 40% OSD cannot claim deduction of NOLCO
simultaneously. Even if the NOLCO was not claimed, the 3 year period shall continue to
run.
If the taxpayer paid its income tax under the MCIT computation, the 3 year period still
runs. (RR 14-01)
Who arent qualified to NOLCO?
1. OBUs for a foreign banking corporation and FCDU of a domestic banking corp
2. Enterprise registered with the BOI enjoying the Income Tax Holiday Incentive
3. PEZA-registered enterprise
4. SBMA-registered enterprise
5. Foreign corp engaged in international shipping or air carriage business in the
Philippines
6. Any person, natural or juridical, enjoying exemption from income tax
Example of NOLCO
Forex losses
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When foreign currency is acquired in connection with the regular course of biz, ordinary
gain or loss results from the fluctuations. Such loss is deductible only in the year that it
is sustained. But since loans have not actually been paid yet, therefore the losses have
not yet been realized and are not deductible yet. (BIR Ruling 206-90)
Annual increase in value of an asset is not taxable income because such increase has not
yet been realized. The increase in value can only be taxed when such is disposed and
there was a gain. The same is true of decrease in value. It is only when the decrease is
realized, before it is allowed to be deducted. (BIR Ruling 144-85)
Wagering loses
Allowed only to the extent of gains from such transactions
Abandonment loses
When a petroleum operation is partially or wholly abandoned, all accumulated
exploration and development expenses shall be allowed as a deduction
Bad debts
(E) Bad Debts. -
(1) In General. - Debts due to the taxpayer actually ascertained to be worthless and charged off within the taxable
year except those not connected with profession, trade or business and those sustained in a transaction entered
into between parties mentioned under Section 36 (B) of this Code: Provided, That recovery of bad debts previously
allowed as deduction in the preceding years shall be included as part of the gross income in the year of recovery to
the extent of the income tax benefit of said deduction.
(2) Securities Becoming Worthless. - If securities, as defined in Section 22 (T), are ascertained to be worthless and
charged off within the taxable year and are capital assets, the loss resulting therefrom shall, in the case of a
taxpayer other than a bank or trust company incorporated under the laws of the Philippines a substantial part of
whose business is the receipt of deposits, for the purpose of this Title, be considered as a loss from the sale or
exchange, on the last day of such taxable year, of capital assets.
Bad debts are debts resulting from worthlessness or uncollectibility of amounts due the
taxpayer by others, arising from money lent or from uncollectible amounts of income
from goods sold or services rendered.
Bad debts are deductible provided that:
o There is an existing indebtedness due to the taxpayer which is valid and legally
demandable (and not losses from investments, as in Hermanos v CIR)
o They are connected with trade, biz or profession of the taxpayer
o They are actually ascertained to be worthless, uncollectible, and charged off
within the taxable year
o The taxpayer must show that it its uncollectible even in the future (Phil Refining v
CTA)
o They are not sustained between related parties
o If they are recovered, they should be included as part of gross income in the year
of recovery (this is the tax benefit rule)
Losses or bad debts must be ascertained to be so and written off during the taxable
year. They are therefore deductible in full or not at all. Theres no partial deductions.
(Hermanos v CIR)
Its worthless-ness depends on the particular facts of each case. It cant be considered
worthless just because of its doubtful value or difficulty to collect.
If its a bank, the BSP is the one that will ascertain the worthlessness and uncollectibility
of the bad debts.
If the receivable is from an insurance company, it cannot be claimed as bad debt unless
the insurance company has been declared closed or insolvent by the Insurance Commish
Securities become worthless are considered to be a loss from sale of capital assets on
the last day of the taxable year except for a bank or trust company.
Illustration of the tax benefit rule for bad debts
o 2010 taxable income before bad debts: P100,000
o Bad debts in 2010: P170,000
o Bad debts recovered in 2011: P130,000
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How much do I report in 2011 as gross income, ie, how much did I benefit
from the bad debt I recorded as a deduction in 2010?
P100,000. Thats how much I benefited from the debts being
written off. I benefited from it because I didnt have to pay the
P100,000 since the bad debt as a deduction covered it fully. (It
would be a different amount if the bad debts were less than the
taxable income before bad debs.) So, I have to include this amount
in the computation in the gross income.
What happens to the P30,000? Its non-taxable.
Depreciation
(F) Depreciation. -
(1) General Rule. - There shall be allowed as a depreciation deduction a reasonable allowance for the exhaustion,
wear and tear (including reasonable allowance for obsolescence) of property used in the trade or business. In the
case of property held by one person for life with remainder to another person, the deduction shall be computed as
if the life tenant were the absolute owner of the property and shall be allowed to the life tenant. In the case of
property held in trust, the allowable deduction shall be apportioned between the income beneficiaries and the
trustees in accordance with the pertinent provisions of the instrument creating the trust, or in the absence of such
provisions, on the basis of the trust income allowable to each.
(2) Use of Certain Methods and Rates. - The term "reasonable allowance" as used in the preceding paragraph shall
include, but not limited to, an allowance computed in accordance with rules and regulations prescribed by the
Secretary of Finance, upon recommendation of the Commissioner, under any of the following methods:
(a) The straight-line method;
(b) Declining-balance method, using a rate not exceeding twice the rate which would have been used had the
annual allowance been computed under the method described in Subsection (F) (1);
(c) The sum-of-the-years-digit method; and
(d) any other method which may be prescribed by the Secretary of Finance upon recommendation of the
Commissioner.
(3) Agreement as to Useful Life on Which Depreciation Rate is Based. - Where under rules and regulations
prescribed by the Secretary of Finance upon recommendation of the Commissioner, the taxpayer and the
Commissioner have entered into an agreement in writing specifically dealing with the useful life and rate of
depreciation of any property, the rate so agreed upon shall be binding on both the taxpayer and the national
Government in the absence of facts and circumstances not taken into consideration during the adoption of such
agreement. The responsibility of establishing the existence of such facts and circumstances shall rest with the party
initiating the modification. Any change in the agreed rate and useful life of the depreciable property as specified in
the agreement shall not be effective for taxable years prior to the taxable year in which notice in writing by
certified mail or registered mail is served by the party initiating such change to the other party to the agreement:
Provided, however, that where the taxpayer has adopted such useful life and depreciation rate for any depreciable
and claimed the depreciation expenses as deduction from his gross income, without any written objection on the
part of the Commissioner or his duly authorized representatives, the aforesaid useful life and depreciation rate so
adopted by the taxpayer for the aforesaid depreciable asset shall be considered binding for purposes of this
Subsection.
(4) Depreciation of Properties Used in Petroleum Operations. - An allowance for depreciation in respect of all
properties directly related to production of petroleum initially placed in service in a taxable year shall be allowed
under the straight-line or declining-balance method of depreciation at the option of the service contractor.
However, if the service contractor initially elects the declining-balance method, it may at any subsequent date,
shift to the straight-line method.
The useful life of properties used in or related to production of petroleum shall be ten (10) years of such shorter life
as may be permitted by the Commissioner.
Properties not used directly in the production of petroleum shall be depreciated under the straight-line method on
the basis of an estimated useful life of five (5) years.
(5) Depreciation of Properties Used in Mining Operations. - an allowance for depreciation in respect of all properties
used in mining operations other than petroleum operations, shall be computed as follows:
(a) At the normal rate of depreciation if the expected life is ten (10) years or less; or
(b) Depreciated over any number of years between five (5) years and the expected life if the latter is more than
ten (10) years, and the depreciation thereon allowed as deduction from taxable income: Provided, That the
contractor notifies the Commissioner at the beginning of the depreciation period which depreciation rate allowed by
this Section will be used.
(6) Depreciation Deductible by Nonresident Aliens Engaged in Trade or Business or Resident Foreign Corporations.
- In the case of a nonresident alien individual engaged in trade or business or resident foreign corporation, a
reasonable allowance for the deterioration of Property arising out of its use or employment or its non-use in the
business trade or profession shall be permitted only when such property is located in the Philippines.
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Depreciation is the gradual diminution in the useful value of tangible property resulting
from wear and tear and normal obsolescence
A reasonable allowance for depreciation is deductible
Some methods to determine reasonable allowance can be found in the codal.
o If the taxpayer and the CIR come to an agreement of the useful life on which
depreciation will be based, this agreement will be considered binding.
Depreciation is allowed on tangible property and intangible property.
A company has the right to claim depreciation, but the law does not allow depreciation
beyond its acquisition cost. (Basilan v CIR)
Depletion
(G) Depletion of Oil and Gas Wells and Mines. -
(1) In General. - In the case of oil and gas wells or mines, a reasonable allowance for depletion or amortization
computed in accordance with the cost-depletion method shall be granted under rules and regulations to be
prescribed by the Secretary of finance, upon recommendation of the Commissioner. Provided, That when the
allowance for depletion shall equal the capital invested no further allowance shall be granted: Provided, further,
That after production in commercial quantities has commenced, certain intangible exploration and development
drilling costs: (a) shall be deductible in the year incurred if such expenditures are incurred for non-producing wells
and/or mines, or (b) shall be deductible in full in the year paid or incurred or at the election of the taxpayer, may
be capitalized and amortized if such expenditures incurred are for producing wells and/or mines in the same
contract area.
"Intangible costs in petroleum operations" refers to any cost incurred in petroleum operations which in itself has no
salvage value and which is incidental to and necessary for the drilling of wells and preparation of wells for the
production of petroleum: Provided, That said costs shall not pertain to the acquisition or improvement of property
of a character subject to the allowance for depreciation except that the allowances for depreciation on such
property shall be deductible under this Subsection.
Any intangible exploration, drilling and development expenses allowed as a deduction in computing taxable income
during the year shall not be taken into consideration in computing the adjusted cost basis for the purpose of
computing allowable cost depletion.
(2) Election to Deduct Exploration and Development Expenditures. - In computing taxable income from mining
operations, the taxpayer may at his option, deduct exploration and development expenditures accumulated as cost
or adjusted basis for cost depletion as of date of prospecting, as well as exploration and development expenditures
paid or incurred during the taxable year: Provided, That the amount deductible for exploration and development
expenditures shall not exceed twenty-five percent (25%) of the net income from mining operations computed
without the benefit of any tax incentives under existing laws. The actual exploration and development expenditures
minus twenty-five percent (25%) of the net income from mining shall be carried forward to the succeeding years
until fully deducted.
The election by the taxpayer to deduct the exploration and development expenditures is irrevocable and shall be
binding in succeeding taxable years.
"Net income from mining operations", as used in this Subsection, shall mean gross income from operations less
"allowable deductions" which are necessary or related to mining operations. "Allowable deductions" shall include
mining, milling and marketing expenses, and depreciation of properties directly used in the mining operations. This
paragraph shall not apply to expenditures for the acquisition or improvement of property of a character which is
subject to the allowance for depreciation.
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In no case shall this paragraph apply with respect to amounts paid or incurred for the exploration and development
of oil and gas.
The term "exploration expenditures" means expenditures paid or incurred for the purpose of ascertaining the
existence, location, extent or quality of any deposit of ore or other mineral, and paid or incurred before the
beginning of the development stage of the mine or deposit.
The term "development expenditures" means expenditures paid or incurred during the development stage of the
mine or other natural deposits. The development stage of a mine or other natural deposit shall begin at the time
when deposits of ore or other minerals are shown to exist in sufficient commercial quantity and quality and shall
end upon commencement of actual commercial extraction.
(3) Depletion of Oil and Gas Wells and Mines Deductible by a Nonresident Alien individual or Foreign Corporation. -
In the case of a nonresident alien individual engaged in trade or business in the Philippines or a resident foreign
corporation, allowance for depletion of oil and gas wells or mines under paragraph (1) of this Subsection shall be
authorized only in respect to oil and gas wells or mines located within the Philippines.
Oil & gas wells or mines are allowed a reasonable allowance for depletion or
amortization computed using the cost-depletion method
When the allowance for depletion equals the capital invested, no further allowance shall
be granted
After production in commercial quantities has started, certain intangible exploration &
drilling costs will be deducted in the eyar incurred if such were incurred for non-
producing wells or mines, or these may be capitalized & amortized if such were incurred
for producing wells or mines in same contract area
If it was a non-resident alien or a resident foreign corporation, the allowance for
depletion is limited to oil wells & mines in the Philippines
The formula for rate of depletion is (cost of mine property)/(estimated ore deposit)
(Consolidated Mines v CTA)
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(3) The level of administrative expense of which shall, on an annual basis, conform with the rules and regulations
to be prescribed by the Secretary of Finance, upon recommendation of the Commissioner, but in no case to exceed
thirty percent (30%) of the total expenses; and
(4) The assets of which, in the even of dissolution, would be distributed to another nonprofit domestic corporation
organized for similar purpose or purposes, or to the state for public purpose, or would be distributed by a court to
another organization to be used in such manner as in the judgment of said court shall best accomplish the general
purpose for which the dissolved organization was organized.
Subject to such terms and conditions as may be prescribed by the Secretary of Finance, the term "utilization"
means:
(i) Any amount in cash or in kind (including administrative expenses) paid or utilized to accomplish one or more
purposes for which the accredited nongovernment organization was created or organized.
(ii) Any amount paid to acquire an asset used (or held for use) directly in carrying out one or more purposes for
which the accredited nongovernment organization was created or organized.
An amount set aside for a specific project which comes within one or more purposes of the accredited
nongovernment organization may be treated as a utilization, but only if at the time such amount is set aside, the
accredited nongovernment organization has established to the satisfaction of the Commissioner that the amount
will be paid for the specific project within a period to be prescribed in rules and regulations to be promulgated by
the Secretary of Finance, upon recommendation of the Commissioner, but not to exceed five (5) years, and the
project is one which can be better accomplished by setting aside such amount than by immediate payment of
funds.
(3) Valuation. - The amount of any charitable contribution of property other than money shall be based on the
acquisition cost of said property.
(4) Proof of Deductions. - Contributions or gifts shall be allowable as deductions only if verified under the rules and
regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner.
Donations to the following are partially deductible:
1. To the government, exclusively for public purposes
2. To accredited domestic corporations or associations which are organized and
operated exclusively for religious, charitable, scientific, youth & sports development,
cultural or educational purposes, or for the rehabilitation of veterans
3. To social welfare institutions
4. To non-accredited NGOs
o The amount that can be deducted should not exceed:
i. 10% (individuals), or
ii. 5% (corporations)
of the taxpayers taxable income derived from trade, biz or
profession before the deduction for contributions and donations.
So, look at two things: 1. your charitable contributions and 2. 10%
or 5% (as the case may be) of your taxable income, and then see
whats lower. That amount is what your allowed to deduct.
Donations to the following are fully deductible:
1. To the government, exclusively to finance activities in education, youth, health,
sports development, human settlements, science and culture, and in economic
development according to the NEDA Plan (in other words, government priority
activities)
2. To certain foreign institutions or international organizations (treaty-based, etc)
3. To accredited NGOs
NGOs are non-profit domestic corporations organized and operated exclusively for
scientific research, educational, character-building and youth & sports development, etc,
where no part of the net income inures to the benefit of any private individual or
stockholder. Their level of admin expenses cannot exceed 30% of the total expenses,
and they must utilize contributions not later than 15th day of the 3rd month (see codal!)
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(2) Amortization of Certain Research and Development Expenditures. - At the election of the taxpayer and in
accordance with the rules and regulations to be prescribed by the Secretary of Finance, upon recommendation of
the Commissioner, the following research and development expenditures may be treated as deferred expenses:
(a) Paid or incurred by the taxpayer in connection with his trade, business or profession;
(b) Not treated as expenses under paragraph 91) hereof; and
(c) Chargeable to capital account but not chargeable to property of a character which is subject to depreciation or
depletion.
In computing taxable income, such deferred expenses shall be allowed as deduction ratably distributed over a
period of not less than sixty (60) months as may be elected by the taxpayer (beginning with the month in which
the taxpayer first realizes benefits from such expenditures).
The election provided by paragraph (2) hereof may be made for any taxable year beginning after the effectivity of
this Code, but only if made not later than the time prescribed by law for filing the return for such taxable year. The
method so elected, and the period selected by the taxpayer, shall be adhered to in computing taxable income for
the taxable year for which the election is made and for all subsequent taxable years unless with the approval of the
Commissioner, a change to a different method is authorized with respect to a part or all of such expenditures. The
election shall not apply to any expenditure paid or incurred during any taxable year for which the taxpayer makes
the election.
(3) Limitations on Deduction. - This Subsection shall not apply to:
(a) Any expenditure for the acquisition or improvement of land, or for the improvement of property to be used in
connection with research and development of a character which is subject to depreciation and depletion; and
(b) Any expenditure paid or incurred for the purpose of ascertaining the existence, location, extent, or quality of
any deposit of ore or other mineral, including oil or gas.
Expenses for R&D can be treated as ordinary and necessary expenses provided that:
1. It is incurred during the taxable year
2. It is incurred in connection with his trade or business
The taxpayer can either fully deduct it or amortize the deductions.
This is not applicable to the expenses:
1. for the acquisition or improvement of land or property to be used in connection with
R&D (these are subject to depreciation or depletion)
2. incurred for the purpose of ascertaining the existence, location, extent or quality of
any deposit of minerals & oil.
Pension trusts
(J) Pension Trusts. - An employer establishing or maintaining a pension trust to provide for the payment of
reasonable pensions to his employees shall be allowed as a deduction (in addition to the contributions to such trust
during the taxable year to cover the pension liability accruing during the year, allowed as a deduction under
Subsection (A) (1) of this Section) a reasonable amount transferred or paid into such trust during the taxable year
in excess of such contributions, but only if such amount (1) has not theretofore been allowed as a deduction, and
(2) is apportioned in equal parts over a period of ten (10) consecutive years beginning with the year in which the
transfer or payment is made.
Two kinds of deduction for employer:
o Under Subsection (A) (1): contributions to such trust to cover the pension liability
during the year
o Under this Section: reasonable amount paid to the trust in excess of such
contributions
The employer who established the pension trust for his employees benefit can deduct it
but:
o The amount paid to the trust is reasonable
o It must not have been previously allowed for deduction (double deduction)
o Must be apportioned in equal parts over a period of 10 consecutive years,
beginning with the year in which the payment is made.
See Sec 118, RR 2 for more details13
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SECTION 118. Payments to employees' pension trusts. An employer who adopts or has adopted a reasonable
pension plan, actuarially sound, and who establishes, or has established, and maintains a pension trust for the
payment of reasonable pensions to his employees shall be allowed to deduct from gross income reasonable
amounts paid to such trust, in accordance with the pension plan (including any reasonable amendment thereof), as
follows:
(a) If the plan contemplates the payment to the trust, in advance of the time when pensions are granted, of
amounts to provide for future pensions payments, then (1) reasonable amounts paid to the trust during the taxable
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When an employer makes a contribution to his employees Personal Equity and
Retirement Account (PERA), the employer can claim this amount as a deduction but only
to the extent of the employers contribution that would complete the maximum allowable
PERA contribution of an employee. (RR 2011-17, with RA 9505).
year representing the pension liability applicable to such year, determined in accordance with the plan, shall be
allowed as a deduction for such year as an ordinary and necessary business expense, and in addition (2) one-tenth
of a reasonable amount transferred or paid to the trust during the taxable year to cover in whole or in part the
pension liability applicable to the years prior to the taxable year, or so transferred or paid to place the trust on a
sound financial basis, shall be allowed as a deduction for the taxable year and for each of the nine succeeding
taxable years.
(b) If the plan does not contemplate the payment to the trust, in advance of the time when pensions are
granted, of amounts to provide for future pension payments, then (1) reasonable amounts paid to the trust during
the taxable year representing the present value of the expected future payments in respect of pensions granted to
employees retired during the taxable year shall be allowed as deduction for such year as an ordinary and necessary
business expense, and in addition (2) one tenth of a reasonable amount transferred or paid to the trust during the
taxable year to cover in whole or in part the present value of the expected future payments in respect of pensions
granted to employees retired prior to the taxable year, or so transferred or paid to place the trust on a sound
financial basis, shall be allowed as a deduction for the taxable year and for each of the nine succeeding taxable
years.
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Non-deductible expenses
SEC. 36. Items Not Deductible.-
(A) General Rule. - In computing net income, no deduction shall in any case be allowed in respect to -
(1) Personal, living or family expenses;
(2) Any amount paid out for new buildings or for permanent improvements, or betterments made to increase the
value of any property or estate;
This Subsection shall not apply to intangible drilling and development costs incurred in petroleum operations which
are deductible under Subsection (G) (1) of Section 34 of this Code.
(3) Any amount expended in restoring property or in making good the exhaustion thereof for which an allowance is
or has been made; or
(4) Premiums paid on any life insurance policy covering the life of any officer or employee, or of any person
financially interested in any trade or business carried on by the taxpayer, individual or corporate, when the
taxpayer is directly or indirectly a beneficiary under such policy.
(B) Losses from Sales or Exchanges of Property. - In computing net income, no deductions shall in any case be
allowed in respect of losses from sales or exchanges of property directly or indirectly -
(1) Between members of a family. For purposes of this paragraph, the family of an individual shall include only his
brothers and sisters (whether by the whole or half-blood), spouse, ancestors, and lineal descendants; or
(2) Except in the case of distributions in liquidation, between an individual and corporation more than fifty percent
(50%) in value of the outstanding stock of which is owned, directly or indirectly, by or for such individual; or
(3) Except in the case of distributions in liquidation, between two corporations more than fifty percent (50%) in
value of the outstanding stock of which is owned, directly or indirectly, by or for the same individual if either one of
such corporations, with respect to the taxable year of the corporation preceding the date of the sale of exchange
was under the law applicable to such taxable year, a personal holding company or a foreign personal holding
company;
(4) Between the grantor and a fiduciary of any trust; or
(5) Between the fiduciary of and the fiduciary of a trust and the fiduciary of another trust if the same person is a
grantor with respect to each trust; or
(6) Between a fiduciary of a trust and beneficiary of such trust.
The following are not deductible:
1. Personal, living or family expenses
2. Any amount paid for new buildings or for permanent improvements made to increase
the value of any property or estate
3. Any amount spent in resotring property or in making good the exhaustion thereof for
which an allowance has been made
4. Premiums paid on any life insurance policy covering the life of any officer, or
employee or if the taxpayer is directly or indirectly a beneficiary under the policy.
No deductions shall be allowed for:
1. Losses from sales or exchanges of property; or
2. Interest expense; or
3. Bad debts
o Where the transaction (either of 1, 2 or 3) is between related taxpayers14.
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SECTION 122. Losses from sales or exchanges of property. No deduction is allowed in respect of losses from
sales or exchanges of property, directly or indirectly
(a) Between members of a family. As used in Section 31, the family of an individual shall include only his
brothers and sisters (whether by the whole or half blood), spouse, ancestors, and lineal descendants;
(b) Except in the case of distributions in liquidation, between an individual and a corporation more than fifty
per centum in value of the outstanding stock of which is owned, directly or indirectly, by or for such individual;
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The following personal expenses are not deductible either:
1. Insurance paid on a dwelling owned & occupied by the taxpayer
2. Premiums paid for life insurance
3. When a professional man rents a property for residential purposes but receives
clients in connection with his work, no part of the rent is allowable as business
expense. (But if he uses part of his house as an office, that portion is considered
business expense, thus deductible)
4. Allowance given by daddy to kids
5. Alimony or allowance paid under a separation agreement
The following capital expenses are not deductible:
1. New buildings, permanent improvements, or any amount spent in restoring property
2. Cost of defending or perfecting title to property
3. Architects services
4. Expense for administration of estate, court costs, attorneys fees and executors
commissions
5. Amount assess & paid under an agreement between bondholders & shareholders of a
corp, to be used in the reorganization of the corp (Sec 119-122, RR 2)15
(c) Except in the case of distributions in liquidation, between two corporations more than 50 per cent in value
of the outstanding stock of each of which is owned, directly or indirectly, by or for the same individual, if either one
of such corporations with respect to the taxable year of the corporation preceding the date of the sale or exchange
was, under the law applicable to such taxable year, a personal holding company or a foreign personal holding
company;
(d) Between a grantor and a fiduciary of any trust;
(e) Between the fiduciary of a trust and the fiduciary of another trust, if the same person is a grantor with
respect to each trust; or
(f) Between a fiduciary of a trust and a beneficiary of such trust.
15
SECTION 119. Personal, living, and family expenses. Personal, living, and family expenses are not deductible.
Insurance paid on a dwelling owned and occupied by a taxpayer is a personal expense and not deductible.
Premiums paid for life insurance by the insured are not deductible. In the case of a professional man who rents a
property for residential purposes, but incidentally receives his clients, patients, or callers in connection with his
professional work (his place of business being elsewhere), no part of the rent is deductible as a business expense.
If however, he uses part of the house for his office, such portion of the rent as is properly attributable to such
office is deductible. Where the father is legally entitled to the services of his minor children, any allowances which
he gives them, whether said to be in consideration of services or otherwise, are not allowable deductions in his
return of income. Alimony, and an allowance paid under a separation agreement are not deductible from gross
income.
SECTION 120. Capital expenditures. No deduction from gross income may be made for any amounts paid out
for new buildings or for permanent improvements or betterments made to increase the value of the taxpayer's
property, or for any amount expended in restoring property or in making good the exhaustion thereof for which an
allowance for depreciation or depletion or other allowance is or has been made. Amounts expended for securing a
copyright and plates, which remain the property of the person making the payments, are investments of capital.
The cost of defending or perfecting title to property constitutes a part of the cost of the property and is not a
deductible expense. The amount expended for architect's services is part of the cost of the building. Commissions
paid in purchasing securities are a part of the cost of such securities. Commissions paid in selling securities are an
offset against the selling price. Expenses of the administration of an estate, such as court costs, attorney's fees,
and executor's commissions, are chargeable against the "corpus" of the estate and are not allowable deductions.
Amounts to be assessed and paid under an agreement between bondholders or shareholders of a corporation, to be
used in a reorganization of the corporation, are investments of capital and not deductible for any purpose in return
of income.
In the case of a corporation, expenses for organization, such as incorporation fees, attorney's fees and
accountants' charges, are ordinarily capital expenditures; but where such expenditures are limited to purely
incidental expenses, a taxpayer may charge such items against income in the year in which they are incurred. A
holding company which guarantees dividends at a specified rate on the stock of a subsidiary corporation for the
purpose of securing new capital for the subsidiary and increasing the value of its stockholdings in the subsidiary
may not deduct amounts paid in carrying out this guaranty in computing its net income, but such payments may
be added to the cost of its stock in the subsidiary.
SECTION 121. Premiums on life insurance of employees. Any amounts paid for premiums on any life
insurance policy covering the life of an officer or employee or of any person financially interested in the business of
the taxpayer when the taxpayer is directly or indirectly a beneficiary under such policy are not deductible.
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Margin levies are not deductible. (Esso v CIR)
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2. Other property of a kind which would properly be included in the inventory of the
taxpayer if on hand at the close of the year
3. Property held by the taxpayer primarily for sale to customers in the ordinary course
of his trade or business
4. Property used in trade or business of a character which is subject to allowance for
depreciation,
5. Real property used in trade or business.
The codal enumerates what are ordinary assets. All assets other than ordinary assets
are capital assets.
Property initially classified as capital asset may later become an ordinary asset and vice
versa. (Calasanz v CIR, wherein inherited land was developed into a subdivision,
changing it from capital to ordinary asset)
Shares of stock would be ordinary assets only to a dealer in securities or a person
engaged in the purchase and sale of, or an active trader in, securities. (China Bank v
CA)
RR 7-2003 has also given guidelines in determining whether real property is a capital or
ordinary asset, to wit (yun eh! To wit raw eh!)
o For those engaged in real estate business, the following are ordinary assets:
i. All real properties acquired by the real estate dealer
ii. All real properties acquired by the real estate developer, whether
developed or undeveloped
iii. All real properties held for sale or lease in the ordinary course of business
or which would be properly be included in the inventory
iv. All real properties acquired for lease/rent
v. All real properties acquired in the ordinary course of business by a
taxpayer habitually engaged in the sale of real estate
o Will the property change nature from ordinary to capital asset?
i. Changing from real estate business to a non-real estate business: NO
ii. Ceasing operations of the real estate business: NO
iii. The properties acquired by the real estate business are abandoned: NO
iv. The properties acquired by the real estate business become idle: NO
v. Real estate business transfers the property to an ordinary person: YES
o The nature of the property CAN change in the hands of the buyer/transferee.
o In case of involuntary transfer (like expropriation or foreclosure), the involuntary
nature shall have NO effect on the classification in the hands of the involuntary
seller.
o For those NOT engaged in the real estate business, real property being used or
have been used in the trade or business are considered ordinary assets.
i. Can these change into capital assets?
YES, provided they show proof that the same have not been used
in business for more than 2 years (prior to the taxable transaction)
o For EXEMPT corporations, real property used in exempt transactions shall not be
considered for business purposes, and thus are CAPITAL assets.
The rules on capital gains and losses are the following: (See Sec 132-135, RR 2)
1. First, keep me in mind that these rules do not apply to:
a. Real property with a capital gain tax, and
b. Shares of stock of a domestic corporation with a capital gain tax,
i. These two kinds of capital assets have their own rates. (Remember the
capital gains tax! The whole 6%, 5%/10% rates! Any capital gain
subject to the capital gain tax shall not be included in the computation
of the taxable income and income tax at the end of the year.)
2. Next, the transaction on the capital asset should be a sale or exchange
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3. In the case of a taxpayer other than a corporation (for individuals only), the
following percentages of the gain or loss shall be taken into account in computing net
capital gain, net capital loss and net income:
a. 100% of the gain/loss, if the asset has been held for not more than 12
months
b. 50% of the gain/loss, if the asset has been held for more than 12 months.
o For corporations, capital gains and losses are always considered at 100%.
4. Losses from sales or exchanges of capital assets shall be allowed only to the extent
of the gains from such sales or exchanges (limitation on capital loss) (see example
below),
o If the taxpayer incurs net capital loss, such loss cannot be deducted from his
ordinary income because the loss can be deducted only to the extent of capital
gains.
5. If any taxpayer, other than a corporation, sustains in any taxable year a net capital
loss, such loss, in an amount not in excess of the net income (taxable income) of
such year, shall be treated in the succeeding year as a loss from a sale or exchange
of a capital asset held for not more than twelve months (meaning, 100% of the
loss). This is what you call the net capital loss carry over.
o Corporations dont have net capital loss carry-over.
Example
Mao is in the buy and sell business, and he had ordinary income of P20,000, capital gains of
P5,000 (from the sale of his personal art collection, which he held for 3 years), and capital
losses of P3,000 (from the sale of his yacht, which he held for 2 years.
Same facts, but Mao had capital gains of P2,000, and capital losses of P7,000.
BIR Ruling 27-02 gives some steps to determine the tax in real estate transactions
o First, determine the character of property being sold.
If property is not used in business of seller, then its a capital asset and
the gain of the seller is subject to 6% capital gains tax based on gross
selling price or fair market value.
If the property is used in the business of the seller, it is treated as
ordinary asset, so the withholding tax rates below shall apply. These rates
will depend on:
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Whether the seller is exempt or taxable
Whether the seller is engaged in real estate business or not
If he is engaged in real estate business, what was the gross selling
price?
Different Scenarios of Sale of Real Property (seller not exempt and real property is
ORDINARY asset)
Seller Buyer Tax Treatment
Corp engaged in real Corp engaged in real Creditable withholding tax based on gross
estate business (sells estate business selling price or fair market value is
6 parcels of land deducted by the buyer (to be credited to
within a year) the seller)
If selling price is P500,000 or less 1.5%
If its P500,000 to P2M 3%
If its above P2m 5%
Corp engaged in real Corp NOT engaged in Same as above
estate business real estate business
Corp NOT engaged in Corp engaged in real If property considered ordinary asset 6%
real estate business estate business creditable withholding
If property considered capital asset 6%
final tax
Corp engaged in real Individual NOT If on installment basis, no withholding tax
estate business engaged in trade or on periodic installments, it will be withheld
business on the last payment
Remember the conditions for exemption from capital gains tax from the sale or exchange of
the principal residence (See Sec 24 (d) (2), all the way near the start of this reviewer)
Ordinary income
Sec 22 (Z) The term "ordinary income" includes any gain from the sale or exchange of property which is not a
capital asset or property described in Section 39(A)(1). Any gain from the sale or exchange of property which is
treated or considered, under other provisions of this Title, as 'ordinary income' shall be treated as gain from the
sale or exchange of property which is not a capital asset as defined in Section 39(A)(1). The term 'ordinary loss'
includes any loss from the sale or exchange of property which is not a capital asset. Any loss from the sale or
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exchange of property which is treated or considered, under other provisions of this Title, as 'ordinary loss' shall be
treated as loss from the sale or exchange of property which is not a capital asset.
Ordinary income is any gain from sale or exchange of property which is not a capital
asset.
o Ordinary loss is the opposite.
Net capital gain is the excess of the gains from such sales or exchanges of capital assets
over the losses from such sales or exchanges.
o Net capital loss is the opposite.
Is it better for real property to be considered capital or ordinary asset?
o Depends.
o For example, the corporation youre counsel for sells a piece of land for P100k.
Do you want to consider it as capital or ordinary?
i. If it were capital, youd get taxed 6% of P100k (capital gains tax), thats
P6,000. You go home with P94k.
ii. If it were ordinary, itll be part of your gross income, which will be taxed
30% after all the deductions have been accounted for. The question is, do
you have enough deductions (and proof) which will enable you to get a
better deal (i.e. more money after all the taxes are paid out)?
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Mode of acquisition Cost basis
1. Acquired by purchase The actual cost
2. By inheritance Fair market value
3. By gift The same as if it would be in the hands of
the donor or the last preceding owner,
BUT if the basis is greater than the fmv,
then the basis shall be the fmv (so,
whatevers lower)
4. Acquired for less than an adequate Amount paid by the transferee for the
consideration in money or its worth property
Example
Mao sold a car worth P100 to Apple Inc, in exchange for P110 worth of Apple Inc stock, P10
cash and P20 property. How much is the gain for Mao? What about the loss for Apple Inc?
Get the amount realized first: P140 (cash + stock + property)
Deduct the basis: P100 (value of car)
Gain: P 40 (gain for Mao), loss of P40 for Apple Inc
How do you make the transaction a tax-free exchange? Check the codal below. Its one of
the most used provisions.
(a) The cost of the property, if acquired by purchase on or after March 1, 1913;
(b) The fair market price or value as of the moment of death of the decedent, if acquired by inheritance;
(c) The basis in the hands of the donor or the last preceding owner by whom the property was not acquired by gift,
if the property was acquired by donation.
If the basis, however, is greater than the fair market value of the property at the time of donation, then, for
purposes of determining loss, the basis shall be such fair market value; or,
(d) The amount paid by the transferee for the property, if the property was acquired for less than an adequate
consideration in money or money's worth.
(e) The adjusted basis of (a) to (d) above, if the acquisition cost of the property is increased by the amount of
improvements that materially add to the value of the property or appreciably prolong its life less accumulated
depreciation.
(f) The substituted basis, if the property was acquired in a previous tax- free exchange under Section 40(C)(2) of
the Tax Code of 1997.
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iii. In a m/c, where a security holder of a corp exchanges his securities in
such corp solely for stock or securities in another corp also a party to the
m/c
iv. Where property is transferred to a corp by a person in exchange for stock
in the corp, and the result of such exchange is that the person (and up to
4 other persons) gains control of the corp, but the stocks issued for
services are not considered as issued in return for property.
Rule of momentary control
o If two tax-free exchanges are done in the same taxable year, they are not
considered tax-free. (Atty. Montero)
(6) Definitions. -
(a) The term "securities" means bonds and debentures but not "notes" of whatever class or duration.
(b) The term "merger" or "consolidation", when used in this Section, shall be understood to mean: (i) the ordinary
merger or consolidation, or (ii) the acquisition by one corporation of all or substantially all the properties of another
corporation solely for stock: Provided, That for a transaction to be regarded as a merger or consolidation within the
purview of this Section, it must be undertaken for a bona fide business purpose and not solely for the purpose of
escaping the burden of taxation: Provided, further, That in determining whether a bona fide business purpose
exists, each and every step of the transaction shall be considered and the whole transaction or series of transaction
shall be treated as a single unit: Provided, finally , That in determining whether the property transferred
constitutes a substantial portion of the property of the transferor, the term 'property' shall be taken to include the
cash assets of the transferor.
(c) The term "control", when used in this Section, shall mean ownership of stocks in a corporation possessing at
least fifty-one percent (51%) of the total voting power of all classes of stocks entitled to vote.
(d) The Secretary of Finance, upon recommendation of the Commissioner, is hereby authorized to issue rules and
regulations for the purpose "substantially all" and for the proper implementation of this Section.
Securities means bonds and debentures, but not notes of whatever class or duration.
Merger or consolidation means:
o The ordinary merger or consolidation
o The acquisition by one corporation of all or almost all the properties of another
corporation solely for stock
A corporate merger where the new corporation continued to operate the business of the
old corporation is not subject to capital gains tax. The merger, however, must be
undertaken for a bona fide business purpose and not solely for the purpose of escaping
the burden of taxation. (CIR v Rufino, where the merger was done to extend the life of
the corporation, this was legitimate)
Transfer of substantially all the assets means a transfer of at least 80% of the assets,
including cash, with some degree of permanence.
Transfer of property for shares of stock: no gain or loss is recognized when a person
transfers property (not services) to a corporation in exchange for shares of stock (alone
or with 4 others), where such person gains control of the corporation (at least 51% of
the total voting power)
The transfer of assets by one corporation to another must have a business purpose.
(Gregory v Helving)
Administrative requirements in case of tax-free exchanges.
o You have to submit the following to the BIR:
i. Sworn certificate on the basis of property to be transferred
ii. Certified true copies (ctc) of the TCT
iii. Ctc of the corresponding tax declaration of the real properties to be
transferred
iv. Ctc of the certificates of stock evidencing shares of stock to be transferred
v. Ctc of the inventory of the property to be transferred (RR 18-01)
Elements of a de factor merger (which is a valid merger)
1. Transfer of all or substantially all of the properties of the transferor corp solely for
stock
2. Undertaken for a bona fide biz purpose, not for escaping taxes
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How does a statutory merger work?
o Y corp acquires all the assets of X corp. X corp gets Y shares in exchange. X corp
then dissolves and distributes these shares to its stockholders.
Difference between a de facto merger v a statutory merger
o In a de facto merger, the transferor is not automatically dissolved
o In a de facto merger, there is no automatic transfer to the transferee of all the
rights, privileges and liabilities of the transferor
Difference between a de facto merger v a transfer to a controlled corporation
o In a de facto merger, the transferor is a corp. in the latter, the transferor may be
an individual.
o In a de facto merger, the requirement is that the transferee acquires all or
substantially all of the properties of the transferor. In the latter, the requirement
is that the transferor gains control of the transferee (own 51% of the voting
power)
(3) Exchange Not Solely in Kind. -
(a) If, in connection with an exchange described in the above exceptions, an individual, a shareholder, a security
holder or a corporation receives not only stock or securities permitted to be received without the recognition of
gain or loss, but also money and/or property, the gain, if any, but not the loss, shall be recognized but in an
amount not in excess of the sum of the money and fair market value of such other property received: Provided,
That as to the shareholder, if the money and/or other property received has the effect of a distribution of a taxable
dividend, there shall be taxed as dividend to the shareholder an amount of the gain recognized not in excess of his
proportionate share of the undistributed earnings and profits of the corporation; the remainder, if any, of the gain
recognized shall be treated as a capital gain.
(b) If, in connection with the exchange described in the above exceptions, the transferor corporation receives not
only stock permitted to be received without the recognition of gain or loss but also money and/or other property,
then (i) if the corporation receiving such money and/or other property distributes it in pursuance of the plan of
merger or consolidation, no gain to the corporation shall be recognized from the exchange, but (ii) if the
corporation receiving such other property and/or money does not distribute it in pursuance of the plan of merger or
consolidation, the gain, if any, but not the loss to the corporation shall be recognized but in an amount not in
excess of the sum of such money and the fair market value of such other property so received, which is not
distributed.
(4) Assumption of Liability. -
(a) If the taxpayer, in connection with the exchanges described in the foregoing exceptions, receives stock or
securities which would be permitted to be received without the recognition of the gain if it were the sole
consideration, and as part of the consideration, another party to the exchange assumes a liability of the taxpayer,
or acquires from the taxpayer property, subject to a liability, then such assumption or acquisition shall not be
treated as money and/or other property, and shall not prevent the exchange from being within the exceptions.
(b) If the amount of the liabilities assumed plus the amount of the liabilities to which the property is subject exceed
the total of the adjusted basis of the property transferred pursuant to such exchange, then such excess shall be
considered as a gain from the sale or exchange of a capital asset or of property which is not a capital asset, as the
case may be.
Assumption of liability in tax-free exchanges:
If the transferor receives stock or securities in a transfer of property, and as part of the
consideration, the other party also assumes the liability of the transferor or that the
property he assumes has a liability, then the property/liability acquired will NOT be
treated as money or other property, so that it still falls under the exception of the Sec
40 (C) and no gain or loss is recognized.
But if the amount of the liability assumed exceeds the total of the adjusted basis of the
property transferred, then the excess is considered a gain from sale of either a capital
asset or an ordinary asset, as the case may be.
Example
Toby transfers property to Apple Inc with an adjusted basis of P15m in exchange for
Apple Incs stock plus Apple Inc assumes Tobys liability of P10m. The exchange is
considered tax-free.
But if the liability of Toby is P20m, then this will exceed the adjusted basis of P15m.
So the P5m will be considered a gain and it will be taxable.
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Cost or basis in tax-free exchanges
(5) Basis -
(a) The basis of the stock or securities received by the transferor upon the exchange specified in the above
exception shall be the same as the basis of the property, stock or securities exchanged, decreased by (1) the
money received, and (2) the fair market value of the other property received, and increased by (a) the amount
treated as dividend of the shareholder and (b) the amount of any gain that was recognized on the exchange:
Provided, That the property received as "boot" shall have as basis its fair market value: Provided, further, That if
as part of the consideration to the transferor, the transferee of property assumes a liability of the transferor or
acquires form the latter property subject to a liability, such assumption or acquisition (in the amount of the
liability) shall, for purposes of this paragraph, be treated as money received by the transferor on the exchange:
Provided, finally, That if the transferor receives several kinds of stock or securities, the Commissioner is hereby
authorized to allocate the basis among the several classes of stocks or securities.
(b) The basis of the property transferred in the hands of the transferee shall be the same as it would be in the
hands of the transferor increased by the amount of the gain recognized to the transferor on the transfer.
When the transferor later on sells or exchanges the stock he got tax-free, the basis for
determining the gain or loss is the substituted basis. This will also be the cost basis
when the transferee later on sells the property acquired.
How to compute the substituted basis:
1. Take the original basis of the property (see the table a few pages back)
a. The original basis is usually whats indicated in the deed of sale (the FMV of
the property is used for accounting purposes) Atty Salvador
2. Subtract any money or the fair market value of any property that may have been
received aside from the shares of stock
3. Add the amount treated as dividend by the shareholder & any gain that was
recognized on the exchange (if any)
Example
Hayley transfers property to Apple Inc for shares of stock. The propertys sale value
was P5m and Hayley received an extra P1m from stock of inventory.
If she later sells her shares of stock to Mel, the substituted basis will be computed as
(P5m-P1m)=P4m.
If Hayley sells the shares to Mel for P6m, her gain will be (P6-P4m) P2m and it will
be subject to capital gains tax.
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o Example: Joey buys share of stock in a corporation and within 30 days, buys
more shares. Then within another 30 days, he sells those shares at a loss. He
cannot claim this loss.
T. Situs of Taxation
SEC. 42. Income from Sources Within the Philippines.-
(A) Gross Income From Sources Within the Philippines. - The following items of gross income shall be treated as
gross income from sources within the Philippines:
(1) Interests. - Interests derived from sources within the Philippines, and interests on bonds, notes or other
interest-bearing obligation of residents, corporate or otherwise;
(2) Dividends. - The amount received as dividends:
(a) from a domestic corporation; and
(b) from a foreign corporation, unless less than fifty percent (50%) of the gross income of such foreign corporation
for the three-year period ending with the close of its taxable year preceding the declaration of such dividends or for
such part of such period as the corporation has been in existence) was derived from sources within the Philippines
as determined under the provisions of this Section; but only in an amount which bears the same ration to such
dividends as the gross income of the corporation for such period derived from sources within the Philippines bears
to its gross income from all sources.
(3) Services. - Compensation for labor or personal services performed in the Philippines;
(4) Rentals and Royalties. - Rentals and royalties from property located in the Philippines or from any interest in
such property, including rentals or royalties for -
(a) The use of or the right or privilege to use in the Philippines any copyright, patent, design or model, plan, secret
formula or process, goodwill, trademark, trade brand or other like property or right;
(b) The use of, or the right to use in the Philippines any industrial, commercial or scientific equipment;
(c) The supply of scientific, technical, industrial or commercial knowledge or information;
(d) The supply of any assistance that is ancillary and subsidiary to, and is furnished as a means of enabling the
application or enjoyment of, any such property or right as is mentioned in paragraph (a), any such equipment as is
mentioned in paragraph (b) or any such knowledge or information as is mentioned in paragraph (c);
(e) The supply of services by a nonresident person or his employee in connection with the use of property or rights
belonging to, or the installation or operation of any brand, machinery or other apparatus purchased from such
nonresident person;
(f) Technical advice, assistance or services rendered in connection with technical management or administration of
any scientific, industrial or commercial undertaking, venture, project or scheme; and
(g) The use of or the right to use:
(i) Motion picture films;
(ii) Films or video tapes for use in connection with television; and
(iii) Tapes for use in connection with radio broadcasting.
(5) Sale of Real Property. - Gains, profits and income from the sale of real property located in the Philippines; and
(6) Sale of Personal Property. - Gains; profits and income from the sale of personal property, as determined in
Subsection (E) of this Section.
(B) Taxable Income From Sources Within the Philippines. -
(1) General Rule. - From the items of gross income specified in Subsection (A) of this Section, there shall be
deducted the expenses, losses and other deductions properly allocated thereto and a ratable part of expenses,
interests, losses and other deductions effectively connected with the business or trade conducted exclusively within
the Philippines which cannot definitely be allocated to some items or class of gross income: Provided, That such
items of deductions shall be allowed only if fully substantiated by all the information necessary for its calculation.
The remainder, if any, shall be treated in full as taxable income from sources within the Philippines.
(2) Exception. - No deductions for interest paid or incurred abroad shall be allowed from the item of gross income
specified in subsection (A) unless indebtedness was actually incurred to provide funds for use in connection with
the conduct or operation of trade or business in the Philippines.
This section is NOT relevant to domestic corporations and resident citizens because they
are taxed worldwide anyway.
The following are treated as gross income from sources within the Philippines (Sec 152-
165, RR 2):
1. Interests including interests on bonds, notes and other interest bearing
obligations:
a. The loan was used here in the Philippines, or
b. The debtor is in the Philippines
2. Dividends from a domestic corporation and a foreign corporation,
a. Unless less than 50% of the gross income of the foreign corporation was
derived from the Philippines (the amount will be based on the same ratio to
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dividends as the gross income for such period derived from sources within
Philippines to its gross income from all sources. Whut?!)
i. Example, a Japanese corporation, who derives income more than 50%
of its income in the Philippines, declares dividends to an American in
Los Angeles. That will be taxed. I just dont know how much.
3. Services compensation for labor or personal services performed in the Philippines
4. Rentals & Royalties from property located in the Philippines or from any interest in
such property for:
a. the use of any copyright, patent, design or model, plan, secret formula or
process, goodwill, trademark, trade brand or other similar stuff
b. the use of any industrial, commercial or scientific equipment
c. the supply of scientific, technical, industrial or commercial knowledge or info
i. This includes investment, training and education accounting (Philamlife
CA GR SP 31283, 1995)
d. the supply of services by a non-resident person in connection with those of
property or rights, or the installation or operation of any brand, machinery, or
other apparatus purchased from such non-resident person
e. technical advise, assistance or services rendered in connection with technical
management of any scientific, industrial or commercial undertaking
f. the use of motion picture films, films for tv, tapes for radio broadcast
5. Sale of real property the gains, profits & income from sale of real property located
in the Philippines
6. Sale of personal property gains, profits and income from sale of personal property,
determined by subsection (E)
The place of the singing of a contract is NEVER an issue or a factor for determining the
source of income. (Atty Montero)
In the CIR v Marubeni case, what was involved was a turnkey contract. Marubeni was a
non-resident foreign corporation. What was interesting here, according to sir, is that a
turnkey contract could be argued to be a divisible contract which has 3 stages
engineering, procurement, and construction. The tax implication of this is that certain
stages of the contract could be argued to be beyond the taxing jurisdiction of the
Philippines.
o For the engineering stage:
i. Royalties is sourced here, so thats taxed. (According to Phil-Am Life v
CTA, royalties are technical fees)
ii. Service fees are probably situated abroad, so thats not taxed here.
o For the procurement stage:
i. Where was the stuff bought? It could be here (which would be taxed) or
abroad (then it wouldnt be taxed)
o For the construction stage:
i. That would definitely be here, so itll be taxed.
o The implication here is that if you can argue that the contract is divisible, you can
also argue that some stages of the contract were not sourced here in the
Philippines, and thus beyond the taxing jurisdiction of the Philippines.
o This would be huge, considering that if the contract was considered indivisible,
then everything would be considered situated here in the Philippines and thus the
whole contract would be fully taxed. Think of how much youd save!
Expenses of a multination corporation directly related to the production of Philippine-
derived income can be deducted from gross income in the Philippines without need of
apportionment, but overhead expenses of its parent company belong to a different
category.
o These are items which cant be definitely allocated or identified with the
operations of the Philippine branch. So, the company can claim as its deductible
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share a ratable part of such expenses based upon the ratio of the local branchs
gross income to the total gross income, worldwide, of the multinational
corporation. (CIR v CTA and Smith Kline)
Reinsurance premiums ceded to foreign reinsurers are considered income from
Philippine sources.
o It is the place of activity creating the income which is controlling, and not the
place of business. (Phil Guaranty v CIR)
RAMO 1-95 applies only to the income tax of:
1. Philippine branches and liaison offices of Japanese trading firms
2. All other foreign trading companies
Worldwide Operating Income X Sales to the Phil x Attribution Rate (75%) x Tax Rate (35%)
Worldwide Sales
For construction
Net Income from Construction and other activities x Tax Rate (35%)
RAMO 1-86 was implemented because the Philippine liaison offices of some
multinational companies were soliciting orders form local importers. But then, these
liaison offices were not reporting as income the sales made to local importers because
they claim that the sale was actually consummated by their head office abroad.
o In this case, the sales purportedly consummated abroad are deemed
constructively consummated here and thus be deemed income from sources
within the philippines
The other issue in RAMO 1-86 was that the Philippine liaison office would solicit orders
from local importers. It then would relay the information to its foreign head office which
looks for exporters of the product and earns a commission. But the commission would
be earned by the head office. So, the Philippine liaison office would not pay tax on these
brokers commissions here.
o Here, he branch shall be considered a commercial broker or indentor; (ii) its
share from compensation as allocated by its home office shall be subject to
commercial broker gross receipts tax; (iii) the branch shall provide itself with
corresponding fixed tax as a commercial broker; and (iv) pay income tax on its
share of compensation.
RR 16-86 talks about the allocation of head office overhead expenses:
o From the items specified in Section37(a) as being derived specifically from
sources within the Philippines, there shall be deducted the expenses, losses, and
other deductions properly allocated thereto and a ratable part of any other
expenses, losses and other deductions effectively connected with the business or
trade conducted exclusively within the Philippines which cannot definitely be
allocated to some items or class of gross income. The remainder shall be included
in full as net income from sources within the Philippines. The ratable part shall be
based upon the following ratios consistently followed from year to year:
i. Gross income from sources within the Philippines to the total gross
income.
ii. Net sales in the Philippines to total net sales.
iii. If any other method of allocation is adopted, a written permission from
the CIR shall first be secured.
The problem here is that deductions being made by the Philippine branch offices of
foreign corps are hard to check because the supporting documents & books of accounts
are not accessible to the BIR. So, the Phil branch offices only submit an audit
certification to back-up their claims for deductions. This order provides several
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procedures for the BIR to determine the correct deductions such as functional analysis,
relevance tests, reasonableness tests and other measures. (RAMO 4-86)
RMO 44-2005 gives the rules for sale of computer hardware bundled with software,
where the software is bundled IN THE PHILIPPINES. (those bundled outside the Phil is
covered by a different RMO)
o Payments to a local copyright owner for transfer of copyright shall be subject to
income tax
i. Transfer by a resident individual owner of copyright: amount paid shall
form part of copyright owners gross income
ii. Transfer by a domestic corporation owner: amount paid shall form part of
corporate gross income
o Payments made to a foreign copyright owner
i. Transfer by a non-resident alien individual: engaged in trade in business
taxed the same way a resident owner is
ii. Transfer by a foreign corporation: amount paid shall form part of
corporate gross income
iii. Transfer by a non-resident foreign corporation: 32% final tax on the
amount paid in consideration
o If the foreign owner is resident of a country with a tax treaty, then royalties will
be based on the treaty.
o Payments by a local reseller/distributor
i. to a domestic corporate owner: 20% final tax on the royalties
ii. to a non-resident foreign owner: 32% final tax to be collected by the local
reseller
o Payments by the end-user to local resellers/distributors of resellers: amount paid
shall form part of resellers gross income
i. End-user will also withhold 2% income tax against the taxable income of
the local subsidiaries, reseller or distributors, PROVIDED the end-user is
either:
A juridical person, whether engaged in business or not, or
An individual, with respect to payments made in connection with
his business, or
A government office
o If a local end-user gets a license straight from the foreign owner, then the
royalties are subject to 32% income tax which will be withheld by the local end-
user
o For VAT purposes, the following are also subject to the VAT:
i. Royalty payments for the use of a copyright over a software
ii. Payments made to resellers/distributtors/retailers who are engaged in
trade or business
iii. Payments for services rendered in the Philippines in connection with
software purchased
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(5) Gains, profits and income from the sale of real property located without the Philippines.
1. Interests other than those derived from sources within
2. Dividends other than those derived from sources within
3. Compensation for labor or personal services performed outside the Phil
4. Rentals or royalties from property located outside the Philippines or any interest in
such property
5. Gains, profits, income from sale of real property located outside the Philippines
Income from sources partly within and partly without the Philippines
(D) Taxable Income From Sources Without the Philippines. - From the items of gross income specified in
Subsection (C) of this Section there shall be deducted the expenses, losses, and other deductions properly
apportioned or allocated thereto and a ratable part of any expense, loss or other deduction which cannot definitely
be allocated to some items or classes of gross income. The remainder, if any, shall be treated in full as taxable
income from sources without the Philippines.
(E) Income From Sources Partly Within and Partly Without the Philippines.- Items of gross income,
expenses, losses and deductions, other than those specified in Subsections (A) and (C) of this Section, shall be
allocated or apportioned to sources within or without the Philippines, under the rules and regulations prescribed by
the Secretary of Finance, upon recommendation of the Commissioner. Where items of gross income are separately
allocated to sources within the Philippines, there shall be deducted (for the purpose of computing the taxable
income therefrom) the expenses, losses and other deductions properly apportioned or allocated thereto and a
ratable part of other expenses, losses or other deductions which cannot definitely be allocated to some items or
classes of gross income. The remainder, if any, shall be included in full as taxable income from sources within the
Philippines. In the case of gross income derived from sources partly within and partly without the Philippines, the
taxable income may first be computed by deducting the expenses, losses or other deductions apportioned or
allocated thereto and a ratable part of any expense, loss or other deduction which cannot definitely be allocated to
some items or classes of gross income; and the portion of such taxable income attributable to sources within the
Philippines may be determined by processes or formulas of general apportionment prescribed by the Secretary of
Finance. Gains, profits and income from the sale of personal property produced (in whole or in part) by the
taxpayer within and sold without the Philippines, or produced (in whole or in part) by the taxpayer without and sold
within the Philippines, shall be treated as derived partly from sources within and partly from sources without the
Philippines.
Gains, profits and income derived from the purchase of personal property within and its sale without the
Philippines, or from the purchase of personal property without and its sale within the Philippines shall be treated as
derived entirely form sources within the country in which sold: Provided, however, That gain from the sale of
shares of stock in a domestic corporation shall be treated as derived entirely form sources within the Philippines
regardless of where the said shares are sold. The transfer by a nonresident alien or a foreign corporation to anyone
of any share of stock issued by a domestic corporation shall not be effected or made in its book unless: (1) the
transferor has filed with the Commissioner a bond conditioned upon the future payment by him of any income tax
that may be due on the gains derived from such transfer, or (2) the Commissioner has certified that the taxes, if
any, imposed in this Title and due on the gain realized from such sale or transfer have been paid. It shall be the
duty of the transferor and the corporation the shares of which are sold or transferred, to advise the transferee of
this requirement.
(F) Definitions. - As used in this Section the words "sale" or "sold" include "exchange" or "exchanged"; and the
word "produced" includes "created", "fabricated", "manufactured", "extracted", "processed", "cured" or "aged".
For the gross income items allocated to sources partly within and partly without the
Philippines,
o there shall be deducted the expenses, losses and other deductions properly
apportioned, and
o and a ratable part of other expenses, losses & deductions which cannot properly
be allocated to some item of gross income.
If there is any remainder, it shall be included in full as taxable income from sources
within the Philippines
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Gains from sale of shares of stock in a domestic corporation are treated as DERIVED
ENTIRELY from sources within the Philippines regardless of where the said shares are
sold.
17
RR 2, Sec 166 General Rule The method of accounting regularly employed by the taxpayer in keeping his
books, if such method clearly reflects his income is to be followed with respect to the time as of which items of
gross income and deductions are to be accounted for. If the taxpayer does not regularly employ a method of
accounting which reflects his income, the computation shall be made in such manner as in the opinion of the
Commissioner of Internal Revenue clearly reflects it. (See section 137 of these regulations for computation of net
income, and section 38 for bases of computation. For the use of inventories, see sections 144 to 151 of these
regulations.)
Sec 167 Methods of accounting It is recognized that no uniform method of accounting can be prescribed for all
taxpayers, and the law contemplates that each taxpayer shall adopt such forms and systems of accounting as are
in his judgment best suited to his purpose. Each taxpayer is required by law to make a return of his true income.
He must, therefore, maintain such accounting records as will enable him to do so. Any approved standard method
of accounting which reflects taxpayers income may be adopted. Among the essential are the following:
(1) In all cases in which the production, purchase, or sale of merchandise of any kind is an income-producing
factor, inventories of the merchandise in hand (including finished goods, work in process, raw materials, and
supplies) should be taken at the beginning and end of the year and used in computing the net income of the year
in accordance with sections 144 to 151 of these regulations.
(2) Expenditures made during the year should be properly classified as between capital an income; that is to say,
expenditures for items of plant, equipment, etc. which have a useful life extending substantially beyond they year
should be charged to capital account and not to expense account; and
(3) In any case in which the cost of capital assets is being recovered through deductions for wear and tear,
depletion, or obsolescence, any expenditure 9other than ordinary repairs) _____ restore the property or prolong its
useful life should be added to the property account or charged against the appropriate reserve and not to current
expenses.
Sec 168 Changes in accounting methods The true income, computed under the law, shall in all cases be entered
in the return. If for any reason the basis of reporting income subject to tax is changed, the taxpayer shall attach to
is return a separate statement setting forth for the taxable year and for the preceding year the classes of items
differently treated under the two systems, specifying in particular all amounts duplicated or entirely omitted as the
result of such change.
A taxpayer who changes the method or recounting employed in keeping his book shall, before computing his
income upon such new method for purposes of taxation, secure the consent of the Commissioner of Internal
Revenue. For the purpose of this section, a change in the method of accounting employed in keeping books means
any change in the accounting treatment of items of income or deduction, such as a change from cash receipts and
disbursement methods to the accrued method, or vice versa; a change involving the basis of valuation employed in
the computation of inventories (see sections 144 to 151 of these regulations); a change from the cash to accrual
method to the long-term contract method, or vice versa; a change in the long-term contract method from the
percentage of computation basis to the completed contract basis, or vice versa (see section 44 of these
regulations); or a change involving the adoption of, or a change in the use of, any other specialized basis of
computing net income such as the crop basis. Application for permission to change the method accounting
employed and the basis upon which the return is made shall be filed within 90 days after the beginning of the
taxable year to be covered by the return. The application shall be accompanied by a statement specifying all
amounts which would be duplicated or entirely omitted as a result of the proposed change. Permission to change
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o When the production, purchase or sale of merchandise of any kind is an income
producing factor, inventories should be taken at the beginning and at the end of
the year
o Expenses should be properly classified between capital and income. Capital
expenses are those which have a long useful life extending substantially beyond
the year
o When the cost of capital assets is being recovered thru deductions for wear &
tear, etc, any expenses made to restore the property or prolong its useful life
should be added to the property account, and not to current expenses
Accrual basis is the default meaning, you report income when earned and report
expense when incurred, i.e. when its legally due, demandable and enforceable.
SEC. 44. Period in which Items of Gross Income Included. - The amount of all items of gross income shall be
included in the gross income for the taxable year in which received by the taxpayer, unless, under methods of
accounting permitted under Section 43, any such amounts are to be properly accounted for as of a different period.
In the case of the death of a taxpayer, there shall be included in computing taxable income for the taxable period
in which falls the date of his death, amounts accrued up to the date of his death if not otherwise properly includible
in respect of such period or a prior period.
The items of gross income are included in the taxable year that they are received by the
taxpayer, unless they are properly accounted for as of a different period.18
SEC. 45. Period for which Deductions and Credits Taken. - The deductions provided for in this Title shall be
taken for the taxable year in which "paid or accrued" or "paid or incurred", dependent upon the method of
accounting the basis of which the net income is computed, unless in order to clearly reflect the income, the
deductions should be taken as of a different period. In the case of the death of a taxpayer, there shall be allowed
as deductions for the taxable period in which falls the date of his death, amounts accrued up to the date of his
death if not otherwise properly allowable in respect of such period or a prior period.
The deduction shall be taken for the taxable year in which it is incurred.
the method of accounting will not be granted unless the taxpayer and the Commissioner of Internal Revenue agree
to the terms and conditions under which the change will be effected.
18
Sec 170 When included in gross income Except as otherwise provided in section 39 in the case of the death of
the taxpayer, gains, profits, and income are to be included in the gross income for the taxable year in which they
are received by the taxpayer, unless they are included as of a different period in accordance with the approved
method of accounting followed by him. If a taxpayer has died there shall also be included in computing for the
taxable period in which he died amounts accrued up to the date of his death if not otherwise properly includible in
respect of such period or a prior period, regardless of the fact that the decedent may have kept his books and
made his returns on the basis of cash receipts and disbursements.
(For income not reduced to possession but considered as constructively received and for examples of constructive
receipt, see sections 52 and 53 of these regulations. For the treatment of income long term contracts, see section
44 of these regulations.)
Sec 171 Paid or incurred or paid or accrued (a) The terms paid or incurred and paid or accrued will be
construed according to the method of accounting upon the basis of which the net income is computed by the
taxpayer. The deductions and credits must be taken for the taxable year, in which paid or accrued or paid or
incurred, unless in order clearly to reflect the income such deductions or credits should be taken as of a different
period. If a taxpayer desires to claim a deduction or a credit as of a period other than the period in which it was
paid or accrued or paid or incurred, he shall attach to his return a statement setting forth his request for
consideration of the case by the Commissioner of Internal Revenue together with a complete statement of the facts
upon which he relies. However, in his income tax return he shall take the deduction or credit only for the taxable
period in which it was actually paid or incurred, or paid or accrued, as the case may be. Upon the audit of the
return, the Commissioner of Internal Revenue will decide whether the case is within the exception provided by law,
and the taxpayer will be advised as to the period for which the deduction or credit is properly allowable.
(b) The provision of paragraph (a) of this section in general are not applicable with respect to the taxable period
during which the taxpayer dies. In such case there shall also be allowed as deductions and credits for such taxable
period amounts accrued and credits for such taxable period, amounts accrued up to the date of his death if not
otherwise allowable with respect to such period or a prior period, regardless of the fact that the decedent was
required to keep his books and make his returns on the basis of cash receipts and disbursements.
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SEC. 46. Change of Accounting Period. If a taxpayer, other than an individual, changes his accounting period
from fiscal year to calendar year, from calendar year to fiscal year, or from one fiscal year to another, the net
income shall, with the approval of the Commissioner, be computed on the basis of such new accounting period,
subject to the provisions of Section 47.
If the taxpayer, other than an individual, changes his accounting period, the net income
will be computed on the basis of his new accounting period.19
SEC. 47. Final or Adjustment Returns for a Period of Less than Twelve (12) Months. -
(A) Returns for Short Period Resulting from Change of Accounting Period. - If a taxpayer, other than an
individual, with the approval of the Commissioner, changes the basis of computing net income from fiscal year to
calendar year, a separate final or adjustment return shall be made for the period between the close of the last
fiscal year for which return was made and the following December 31. If the change is from calendar year to fiscal
year, a separate final or adjustment return shall be made for the period between the close of the last calendar year
for which return was made and the date designated as the close of the fiscal year. If the change is from one fiscal
year to another fiscal year, a separate final or adjustment return shall be made for the period between the close of
the former fiscal year and the date designated as the close of the new fiscal year.
(B) Income Computed on Basis of Short Period. - Where a separate final or adjustment return is made under
Subsection (A) on account of a change in the accounting period, and in all other cases where a separate final or
adjustment return is required or permitted by rules and regulations prescribed by the Secretary of Finance, upon
recommendation of the Commissioner, to be made for a fractional part of a year, then the income shall be
computed on the basis of the period for which separate final or adjustment return is made.
If the taxpayer changes his accounting period, a separate return must be made for the
gap caused by the change. Income will be apportioned properly.20
Short-term periods are also needed in instances of death and dissolution of a
corporation.
SEC. 48. Accounting for Long-Term Contracts. - Income from long-term contracts shall be reported for tax
purposes in the manner as provided in this Section. As used herein, the term 'long-term contracts' means building,
installation or construction contracts covering a period in excess of one (1) year. Persons whose gross income is
derived in whole or in part from such contracts shall report such income upon the basis of percentage of
completion. The return should be accompanied by a return certificate of architects or engineers showing the
percentage of completion during the taxable year of the entire work performed under contract. There should be
deducted from such gross income all expenditures made during the taxable year on account of the contract,
account being taken of the material and supplies on hand at the beginning and end of the taxable period for use in
connection with the work under the contract but not yet so applied. If upon completion of a contract, it is found
that the taxable net income arising thereunder has not been clearly reflected for any year or years, the
Commissioner may permit or require an amended return.
19
Sec 169 Accounting Period Income tax returns, whether for individual of for corporations, associations, or
partnerships, are required to be made and their income computed for each calendar year ending on December 31st
of every year. However, corporations, associations or partnerships may with the approval of the Commissioner of
Internal Revenue ___ secured, file their returns and compute their income on the basis of a fiscal year which
means an accounting period of twelve months ending on the last day of any month other than December. But in no
instance shall individual taxpayers be authorized to establish fiscal year as basis for filing their returns and
computing their income. (For authority to file on fiscal year basis see section 172 of these regulations).
Sec 172 Change of accounting period. If a corporation, including a duly registered general partnership, desires to
change its accounting period from the fiscal year to calendar year or from calendar year to fiscal year, or from one
fiscal to another, it shall at any time not less than thirty days prior to the date fixed in section 46 (b) of the Code
for the filing of its return on the basis of its original accounting period submit a written application to the
Commissioner of Internal Revenue designating the proposed date for the closing of its new taxable year, together
with a statement of the date on which the books of account were opened and closed each year for the past three
years, the date on which the taxable year began and ended as shown on the returns filed for the past three years,
and the reasons why the change in accounting period is desired.
20
Sec 173 Returns for periods of less than twelve months No returns can be made for a period of more than
twelve months. A separate return for the fractional part of a year is therefore required whenever there is a change,
with the approval of the Commissioner of Internal Revenue, in the basis of computing net income from one taxable
year to another taxable year. The periods to be covered by such separate returns in the several cases stated in
section 42 (a). The requirements with respect to the filing of a separate return and the payment of tax for a part of
a year are the same as for the filing of a separate return and the payment of tax for a part of a year are the same
as for the filing of a return and the payment of tax for a full taxable year closing at the same time.
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Long term means building, installation or construction contracts covering a period in
excess of 1 year.
Persons reporting long-term contracts must report it on basis of percentage of
completion21.
21
RR-2, Sec 44 Long term contracts. Income from long-term contracts is taxable for the period in which the
income is determined, such determination depending upon the nature and terms of the particular contract. As used
herein the term long-term contracts mean building, installation or construction contracts covering a period in
excess of one year. Persons whose income is derived in whole or in part from such contracts may, as to such
income, prepare their returns upon the following bases:
(a) Gross income derived from such contracts may be reported upon the basis of percentage of completion. In such
case there should accompany the return certificate of architects, or engineers showing the percentage of
completion during the taxable year of the entire work performed under contract. There should be deducted from
such gross income all expenditures made during the taxable year on account of the contract, account being taken
of the material and supplies period for use in connection with the work under the contract but not yet so applied. If
upon completion of a contract, it is found that the taxable net income arising thereunder has not been clearly
reflected for any year or years, the CIR may permit or require an amended return.
(b) Gross income may be reported in the taxable year in which the contract is finally completed and accepted if the
taxpayer elects as a consistent practice to treat such income, provided such method clearly reflects the net income.
If this method is adopted there should be deducted from gross income all expenditures during the life of the
contract which are properly allocated thereto, taking into consideration any material and supplies charged to the
work under the contract but remaining on hand at the time of the completion.
When a taxpayer has filed his return in accordance with the method of accounting regularly employed by him in
keeping his books and such method clearly reflects the income, he will not be required to change either of the
methods above set forth. If a taxpayer desires to change his method of accounting in accordance with paragraphs
(a) and (b) above, a statement showing the composition of all items appearing upon his balance sheet and used in
connection with the method of accounting formerly employed by him, should accompany his return.
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o A person who regularly sells personal property on the installment plan may
return as income in any taxable year that proportion of the installment payment
which the gross profit realized bears to the total contract price
Sale of real property and casual sales of personal property
o If the price exceeds P1000 or where the initial payment does not exceed 25% of
the selling price, the same basis as above may be followed
Sales of real property considered as capital asset by individuals
o An individual who sells real property considered as capital asset may pay the
capital gains tax in installments under the rules of the BIR
Changes from Accrual to installment basis
o When a taxpayer decides to report his taxable income on the installment basis,
the amounts actually received in prior years are not excluded
See RR 2, Sec 174-179 (haba eh, sayang sa papel)
If postdated checks were given to pay a sale on installments, and then the postdated
checks were discounted (i.e. sold to a 3rd person to get the cash immediately), this is
still considered a sale on installment. (Banas v CA, because the postdated checks were
evidence of indebtedness)
SEC. 50. Allocation of Income and Deductions. - In the case of two or more organizations, trades or
businesses (whether or not incorporated and whether or not organized in the Philippines) owned or controlled
directly or indirectly by the same interests, the Commissioner is authorized to distribute, apportion or allocate
gross income or deductions between or among such organization, trade or business, if he determined that such
distribution, apportionment or allocation is necessary in order to prevent evasion of taxes or clearly to reflect the
income of any such organization, trade or business.
When two or more organizations, trades or businesses are owned or controlled directly
or indirectly by the same interests, the CIR can distribute, apportion or allocate gross
income or deductions between or among such orgs, trades or businesses, in order to
prevent tax evasion.
On the net worth method, from Perez v CTA, L-10507, May 30, 1958:
o On the application of the net worth method of determining taxable income, used
by the collector and upheld by the court below, it must he explained that the
method is based upon the general theory that money and other assets in excess
of liabilities of a taxpayer (after an accurate and proper adjustment of non-
deductible items) not accounted for by his income tax returns, leads to the
inference that part of his income has not been reported. The authority to use this
method in determining income is rooted in or stems from section 41 of the
Internal Revenue Code of 1939 of the United States. No cogent reason is shown
for deviating from this practice in the Philippines. In fact section 38 of the
National Internal Revenue Code authorizes the application of the Net Worth
Method in this jurisdiction.
(B) Exception. - The tax imposed by this Title shall not apply to employee's trust which forms part of a pension,
stock bonus or profit-sharing plan of an employer for the benefit of some or all of his employees (1) if contributions
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are made to the trust by such employer, or employees, or both for the purpose of distributing to such employees
the earnings and principal of the fund accumulated by the trust in accordance with such plan, and (2) if under the
trust instrument it is impossible, at any time prior to the satisfaction of all liabilities with respect to employees
under the trust, for any part of the corpus or income to be (within the taxable year or thereafter) used for, or
diverted to, purposes other than for the exclusive benefit of his employees: Provided, That any amount actually
distributed to any employee or distributee shall be taxable to him in the year in which so distributed to the extent
that it exceeds the amount contributed by such employee or distributee.
SEC. 61. Taxable Income. - The taxable income of the estate or trust shall be computed in the same manner and
on the same basis as in the case of an individual, except that:
(A) There shall be allowed as a deduction in computing the taxable income of the estate or trust the amount of the
income of the estate or trust for the taxable year which is to be distributed currently by the fiduciary to the
beneficiaries, and the amount of the income collected by a guardian of an infant which is to be held or distributed
as the court may direct, but the amount so allowed as a deduction shall be included in computing the taxable
income of the beneficiaries, whether distributed to them or not. Any amount allowed as a deduction under this
Subsection shall not be allowed as a deduction under Subsection (B) of this Section in the same or any succeeding
taxable year.
(B) In the case of income received by estates of deceased persons during the period of administration or
settlement of the estate, and in the case of income which, in the discretion of the fiduciary, may be either
distributed to the beneficiary or accumulated, there shall be allowed as an additional deduction in computing the
taxable income of the estate or trust the amount of the income of the estate or trust for its taxable year, which is
properly paid or credited during such year to any legatee, heir or beneficiary but the amount so allowed as a
deduction shall be included in computing the taxable income of the legatee, heir or beneficiary.
(C) In the case of a trust administered in a foreign country, the deductions mentioned in Subsections (A) and (B) of
this Section shall not be allowed: Provided, That the amount of any income included in the return of said trust shall
not be included in computing the income of the beneficiaries.
SEC. 62. Exemption Allowed to Estates and Trusts. - For the purpose of the tax provided for in this Title, there shall
be allowed an exemption of Twenty thousand pesos (P20,000) from the income of the estate or trust.
SEC. 63. Revocable trusts. - Where at any time the power to revest in the grantor title to any part of the corpus of
the trust is vested (1) in the grantor either alone or in conjunction with any person not having a substantial
adverse interest in the disposition of such part of the corpus or the income therefrom, or (2) in any person not
having a substantial adverse interest in the disposition of such part of the corpus or the income therefrom, the
income of such part of the trust shall be included in computing the taxable income of the grantor.
SEC. 64. Income for Benefit of Grantor.-
(A) Where any part of the income of a trust (1) is, or in the discretion of the grantor or of any person not having a
substantial adverse interest in the disposition of such part of the income may be held or accumulated for future
distribution to the grantor, or (2) may, or in the discretion of the grantor or of any person not having a substantial
adverse interest in the disposition of such part of the income, be distributed to the grantor, or (3) is, or in the
discretion of the grantor or of any person not having a substantial adverse interest in the disposition of such part of
the income may be applied to the payment of premiums upon policies of insurance on the life of the grantor, such
part of the income of the trust shall be included in computing the taxable income of the grantor.
(B) As used in this Section, the term 'in the discretion of the grantor' means in the discretion of the grantor, either
alone or in conjunction with any person not having a substantial adverse interest in the disposition of the part of
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where such fiduciaries reside; under such rules and regulations as the Secretary of Finance, upon recommendation
of the Commissioner, shall prescribe, shall be a sufficient compliance with the requirements of this Section.
SEC. 66. Fiduciaries Indemnified Against Claims for Taxes Paid. - Trustees, executors, administrators and other
fiduciaries are indemnified against the claims or demands of every beneficiary for all payments of taxes which they
shall be required to make under the provisions of this Title, and they shall have credit for the amount of such
payments against the beneficiary or principal in any accounting which they make as such trustees or other
fiduciaries.
A trust is a legal arrangement where the owner of the property (trustor) transfers
ownership to a person (trustee) to hold and control the property for the benefit of
another person (beneficiary)
An estate is created by operation of law when an individual dies, leaving propreties to
heirs.
Taxable estates and trusts are taxed in the same manner and on the same basis as in
the case of an individual.
The following are allowed deductions for the estate and trust:
o amount distributed to the beneficiaries, or
o amount collected by a guardian of an infant which is to be held or distributed as
the court may direct
in both these cases, the amount allowed shall be included in computing
the taxable income of the beneficiaries whether distributed to them or not
o Rule for income received by estates of deceased persons during the period of
administration or settlement of the estate, and in the case of income, which may
be either distributed to the beneficiary or accumulated: the amount paid or
credited to any legatee, heir or beneficiary shall be allowed as a deduction
Provided that the amount so allowed as a deduction shall be included in
computing the taxable income of the legatee, heir or beneficiary
Trusts and estates are entitled to a personal exemption equivalent to a single individual
of P20,000.
The income of a trust will be taxed to the:
o Trustor, if revocable trust
o Trustee, if irrevocable trust
When this provision will NOT apply: The income tax is NOT imposed on employees' trust
which forms part of a pension, stock bonus or profit sharing plan of an employer for the
benefit of some or all of his employees
o if contributions are made to the trust by such employer, or employees, or both,
for the purpose of distributing to such employees the earnings and principal of
the fund accumulated by the trust in accordance with such plan; and
o if under the trust instrument it is impossible, at any time prior to the satisfaction
of all liabilities with respect to employees under the trust, for part of the corpus
or income to (within the taxable year or thereafter) used for, or diverted to,
purposes other than for the exclusive benefit of the employees.
o Any amount, however, actually distributed to any employee or distributee shall
be taxable to him in the year in which so distributed to the extent that it exceeds
the amount contributed by such employee or distributee.
Income for the benefit of the grantor:
o Rules on revocable trust will apply for income for the benefit of the grantor.
o The following will be included in the taxable income of the grantor:
Where any part of the income of a trust is, or in the discretion of the
grantor or of any person not having a substantial adverse interest in the
disposition of such part of the income
may be held or accumulated for future distribution to the grantor;
or
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may, or in the discretion of the grantor or of any person not having
a substantial adverse interest in the disposition of such part of the
income, be distributed to the grantor; or
is, or in the discretion of the grantor or of any person not having a
substantial adverse interest in the disposition of such part of the
income may be applied to the payment of the premiums upon
policies of insurance on the life of the grantor
Refer to Sec 207-213, RR 2 for more details
(2) The following individuals shall not be required to file an income tax return;
(a) An individual whose gross income does not exceed his total personal and additional exemptions for dependents
under Section 35: Provided, That a citizen of the Philippines and any alien individual engaged in business or
practice of profession within the Philippine shall file an income tax return, regardless of the amount of gross
income;
(b) An individual with respect to pure compensation income, as defined in Section 32(A)(1), derived from such
sources within the Philippines, the income tax on which has been correctly withheld under the provisions of Section
79 of this Code: Provided, That an individual deriving compensation concurrently from two or more employers at
any time during the taxable year shall file an income tax return;
(c) An individual whose sole income has been subjected to final withholding tax pursuant to Section 57(A) of this
Code; and
(d) A minimum wage earner as defined in Section 22(HH) of this Code or an individual who is exempt from income
tax pursuant to the provisions of this Code and other laws, general or special.
(3) The forgoing notwithstanding, any individual not required to file an income tax return may nevertheless be
required to file an information return pursuant to rules and regulations prescribed by the Secretary of Finance,
upon recommendation of the Commissioner.
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b. Aliens employed by ROHQs with respect to their compensation income
c. Aliens employed by OBUs with respect to their compensation income
d. Aliens employed by foreign service contractors and subcontractors engaged in
petroleum exploration, with respect to their compensation income
4. Minimum wage earners
5. Those exempted by the Tax code and other special laws
(4) The income tax return shall be filed in duplicate by the following persons:
(a) A resident citizen - on his income from all sources;
(b) A nonresident citizen - on his income derived from sources within the Philippines;
(c) A resident alien - on his income derived from sources within the Philippines; and
(d) A nonresident alien engaged in trade or business in the Philippines - on his income derived from sources within
the Philippines.
Where to file?
1. Authorized agent bank
2. Revenue district officer
3. Collection agent
4. Duly authorized city treasurer where he is legally residing
5. Office of the commissioner
When to file?
On or before April 15 of each year
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How about parents and kids?
Parents must include the income of unmarried minors derived from property received
from a living parent.
o EXCEPT
i. When the donors tax has already been paid on such property
ii. When the transfer of such property is exempt from donors tax
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Annual Declaration of income tax
SEC. 74. Declaration of Income Tax for Individuals. -
(A) In General. - Except as otherwise provided in this Section, every individual subject to income tax under
Sections 24 and 25(A) of this Title, who is receiving self-employment income, whether it constitutes the sole source
of his income or in combination with salaries, wages and other fixed or determinable income, shall make and file a
declaration of his estimated income for the current taxable year on or before April 15 of the same taxable year. In
general, self-employment income consists of the earnings derived by the individual from the practice of profession
or conduct of trade or business carried on by him as a sole proprietor or by a partnership of which he is a member.
Nonresident Filipino citizens, with respect to income from without the Philippines, and nonresident aliens not
engaged in trade or business in the Philippines, are not required to render a declaration of estimated income tax.
The declaration shall contain such pertinent information as the Secretary of Finance, upon recommendation of the
Commissioner, may, by rules and regulations prescribe. An individual may make amendments of a declaration filed
during the taxable year under the rules and regulations prescribed by the Secretary of Finance, upon
recommendation of the Commissioner.
(B) Return and Payment of Estimated Income Tax by Individuals. - The amount of estimated income as defined in
Subsection (C) with respect to which a declaration is required under Subsection (A) shall be paid in four (4)
installments. The first installment shall be paid at the time of the declaration and the second and third shall be paid
on August 15 and November 15 of the current year, respectively. The fourth installment shall be paid on or before
April 15 of the following calendar year when the final adjusted income tax return is due to be filed.
(C) Definition of Estimated Tax. - In the case of an individual, the term "estimated tax" means the amount which
the individual declared as income tax in his final adjusted and annual income tax return for the preceding taxable
year minus the sum of the credits allowed under this Title against the said tax. If, during the current taxable year,
the taxpayer reasonable expects to pay a bigger income tax, he shall file an amended declaration during any
interval of installment payment dates.
Individuals who receive self-employment income must make and file a declaration of his
estimated income for the current year on or before April 15
o Remember this because as lawyers we will go under this provision
Self-employment income consists of earnings from the practice of a profession or
conduct of trade or business carried on as the sole proprietor or a partnership of which
he is a member
Quarterly payment of income tax, in 4 installments
o First at time of declaration
o Second August 15
o Third November 15
o Fourth On or before April 15
Corporate returns
SEC. 52. Corporation Returns. -
(A) Requirements. - Every corporation subject to the tax herein imposed, except foreign corporations not engaged
in trade or business in the Philippines, shall render, in duplicate, a true and accurate quarterly income tax return
and final or adjustment return in accordance with the provisions of Chapter XII of this Title. The return shall be
filed by the president, vice-president or other principal officer, and shall be sworn to by such officer and by the
treasurer or assistant treasurer.
(B) Taxable Year of Corporation. - A corporation may employ either calendar year or fiscal year as a basis for filing
its annual income tax return: Provided, That the corporation shall not change the accounting period employed
without prior approval from the Commissioner in accordance with the provisions of Section 47 of this Code.
(C) Return of Corporation Contemplating Dissolution or Reorganization. - Every corporation shall, within thirty (30)
days after the adoption by the corporation of a resolution or plan for its dissolution, or for the liquidation of the
whole or any part of its capital stock, including a corporation which has been notified of possible involuntary
dissolution by the Securities and Exchange Commission, or for its reorganization, render a correct return to the
Commissioner, verified under oath, setting forth the terms of such resolution or plan and such other information as
the Secretary of Finance, upon recommendation of the commissioner, shall, by rules and regulations, prescribe.
The dissolving or reorganizing corporation shall, prior to the issuance by the Securities and Exchange Commission
of the Certificate of Dissolution or Reorganization, as may be defined by rules and regulations prescribed by the
Secretary of Finance, upon recommendation of the Commissioner, secure a certificate of tax clearance from the
Bureau of Internal Revenue which certificate shall be submitted to the Securities and Exchange Commission.
(D) Return on Capital Gains Realized from Sale of Shares of Stock not Traded in the Local Stock Exchange. - Every
corporation deriving capital gains from the sale or exchange of shares of stock not traded thru a local stock
exchange as prescribed under Sections 24 (c), 25 (A)(3), 27 (E)(2), 28(A)(8)(c) and 28 (B)(5)(c), shall file a
return within thirty (30) days after each transactions and a final consolidated return of all transactions during the
taxable year on or before the fifteenth (15th) day of the fourth (4th) month following the close of the taxable year.
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SEC. 53. Extension of Time to File Returns. - The Commissioner may, in meritorious cases, grant a reasonable
extension of time for filing returns of income (or final and adjustment returns in case of corporations), subject to
the provisions of Section 56 of this Code.
All corporations, except foreign corporation not engaged in trade or biz in Philippines
(because theyre subject to final withholding tax already), are required to file:
o Quarterly income tax return, on a cumulative basis for the preceding quarters
o A final or adjustment return, on or before April 15
A corporation may use either calendar year or fiscal eyar basis for filing
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(C) Time of Payment of the Income Tax. - The income tax due on the corporate quarterly returns and the final
adjustment income tax returns computed in accordance with Sections 75 and 76 shall be paid at the time the
declaration or return is filed in a manner prescribed by the Commissioner.
Where to file: same as individuals
When to file:
o For quarterly declarations: within 60 days following the close of the quarter
o For final: on or before April 15, or the 15th day of the 4th month following the
close of the fiscal year
When to pay: same as individuals
W. Withholding Tax
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Final Withholding Tax at Source
SEC. 57. Withholding of Tax at Source. -
(A) Withholding of Final Tax on Certain Incomes. - Subject to rules and regulations the Secretary of Finance may
promulgate, upon the recommendation of the Commissioner, requiring the filing of income tax return by certain
income payees, the tax imposed or prescribed by Sections 24(B)(1), 24(B)(2), 24(C), 24(D)(1); 25(A)(2),
25(A)(3), 25(B), 25(C), 25(D), 25(E), 27(D)(!), 27(D)(2), 27(D)(3), 27(D)(5), 28 (A)(4), 28(A)(5), 28(A)(7)(a),
28(A)(7)(b), 28(A)(7)(c), 28(B)(1), 28(B)(2), 28(B)(3), 28(B)(4), 28(B)(5)(a), 28(B)(5)(b), 28(B)(5)(c); 33; and
282 of this Code on specified items of income shall be withheld by payor-corporation and/or person and paid in the
same manner and subject to the same conditions as provided in Section 58 of this Code.
Income subject to final tax refers to income wherein the tax due is fully collected
through the withholding tax system, wherein the payor of the income withholds the tax
and then remits it to the government.
Once full payment has been withheld and remitted, there is no more tax obligation.
The withholding agent is entitled to refund or tax credit. (CIR v Wander)
Principles of Final Withholding Tax (Section 2.57 (A), RR 2-98)
o The amount of tax withheld is full and final.
o The liability for payment of the tax rests primarily on the withholding agent as
payor.
i. In case he fails to withhold, he will be liable for the deficiency.
o The payee is not required to file and income tax return for the particular income.
o The finality of the withheld tax is limited on that particular income and will not
extend to the payees other tax liability on said income.
i. For example a bank received income subject to final withholding tax, the
same income can still be subject to a percentage tax.
Basically, items under passive income are subject to FINAL TAX. And then you have
other FINAL TAXES here and there (like the FBT, BPRT, Capital Gains Tax, etc). Anyway,
heres a rundown. Again, these may or may not be complete.
Special Aliens
Employed by ROHQ 15% (except
income subject
to FBT)
Employed by OBU 15%
Employed by Foreign Petroleum Service Contractors & Subcontractors 15%
Withholding on Wages
Applies to ALL EMPLOYED individuals whether citizens or aliens deriving income from
compensation for services rendered in the Phil
SEC. 78. Definitions. - As used in this Chapter:
(A) Wages. - The term 'wages' means all remuneration (other than fees paid to a public official) for services
performed by an employee for his employer, including the cash value of all remuneration paid in any medium other
than cash, except that such term shall not include remuneration paid:
(1) For agricultural labor paid entirely in products of the farm where the labor is performed, or
(2) For domestic service in a private home, or
(3) For casual labor not in the course of the employer's trade or business, or
(4) For services by a citizen or resident of the Philippines for a foreign government or an international
organization.
If the remuneration paid by an employer to an employee for services performed during one-half (1/2) or more of
any payroll period of not more than thirty-one (31) consecutive days constitutes wages, all the remuneration paid
by such employer to such employee for such period shall be deemed to be wages; but if the remuneration paid by
an employer to an employee for services performed during more than one -half (1/2) of any such payroll period
does not constitute wages, then none of the remuneration paid by such employer to such employee for such period
shall be deemed to be wages.
(B) Payroll Period. - The term 'payroll period' means a period for which payment of wages is ordinarily made to
the employee by his employer, and the term "miscellaneous payroll period" means a payroll period other than, a
daily, weekly, biweekly, semi-monthly, monthly, quarterly, semi-annual, or annual period.
(C) Employee. - The term 'employee' refers to any individual who is the recipient of wages and includes an
officer, employee or elected official of the Government of the Philippines or any political subdivision, agency or
instrumentality thereof. The term "employee" also includes an officer of a corporation.
(D) Employer. - The term "employer" means the person for whom an individual performs or performed any
service, of whatever nature, as the employee of such person, except that:
(1) If the person for whom the individual performs or performed any service does not have control of the payment
of the wages for such services, the term "employer" (except for the purpose of Subsection (A) means the person
having control of the payment of such wages; and
(2) In the case of a person paying wages on behalf of a nonresident alien individual, foreign partnership or foreign
corporation not engaged in trade or business within the Philippines, the term "employer" (except for the purpose of
Subsection (A) means such person.
Wages are all remuneration other than fees paid to a public official for services
performed by an employee for his employer (cash or kind).
o EXCEPT
i. Agricultural labor paid entirely in products of the farm where the labor is
perfomed
ii. Domestic service in a private home (maids)
iii. Casual labor not in the course of the employers trade or biz
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iv. Services by a citizen or resident of the Phil for a foreign gov or
international org
SEC. 81. Filing of Return and Payment of Taxes Withheld. - Exept as the Commissioner otherwise permits,
taxes deducted and withheld by the employer on wages of employees shall be covered by a return and paid to an
authorized agent bank; Collection Agent, or the duly authorized Treasurer of the city or municipality where the
employer has his legal residence or principal place of business, or in case the employer is a corporation, where the
principal office is located.
The return shall be filed and the payment made within twenty-five (25) days from the close of each calendar
quarter: Provided, however, That the Commissioner may, with the approval of the Secretary of Finance, require the
employers to pay or deposit the taxes deducted and withheld at more frequent intervals, in cases where such
requirement is deemed necessary to protect the interest of the Government.
The taxes deducted and withheld by employers shall be held in a special fund in trust for the Government until the
same are paid to the said collecting officers.
Should be filed and paid within 25 days from the close of each calendar quarter.
SEC. 82. Return and Payment in Case of Government Employees. - Ifthe employer is the Government of
the Philippines or any political subdivision, agency or instrumentality thereof, the return of the amount deducted
and withheld upon any wage shall be made by the officer or employee having control of the payment of such wage,
or by any officer or employee duly designated for the purpose.
Withholding tax by government agencies:
YOU MADE IT!!! WOOHOOO!!!!! (unless you want to review again, then good luck!)